Application Of Computational Methods In Real Estate Investment Trusts

Completed calendar_month 2014 group 2 Students

descriptionProject Overview

The purpose of this study is to establish various ways in which computational methods are applied in evaluation of real estate investment trusts, particularly in the pricing and valuation of real estate assets. The use of computational methods to evaluate REITs is necessary to aid investors in making prudent decisions pertaining to which assets to invest in and estimating their expected returns. The first model employed is the discounted cash flow model (DCFM). In the DCFM all expected future cash flows are discounted to the present time to establish the value of the asset. The second model is adjusted present value (APV) model with Monte Carlo simulations which is an improvement on the DCF model since it factors in uncertainties in its valuation of real estate assets. Another model employed is the Capital asset pricing model (CAPM). In this model the total excess returns from each REIT are regressed against the total excess returns of the broad market index. In addition to these three models the Fama-French Model (FFM) and the Arbitrage pricing model have been included. The FFM includes the two firm-specific factors developed by Fama and French. The arbitrage pricing model includes macro-economic factors that represent changes in inflation and risk premium.