Farrell, M L (1996) Real property valuation in a context of Knight-Keynes uncertainty. Journal of Financial Management of Property and Construction, 1(1), pp. 5-20. ISSN 1366-4387
Abstract
The discounted cash flow method is often used to determine what a typical investor would pay for the income stream expected from a given real estate investment property. In the context of uncertainty the probability that a real estate investment will be profitable can be estimated from the Net Present Value (NPV) probability distribution. Know in the finance literature as the State Preference Model and referred to in the real estate literature as Knight-Keynes Uncertainty this concept has not as yet been presented in a form which can be used to rank prospective real estate investment projects. This article presents a practical technique which can be used to operationalize and measure the Knight-Keynes Uncertainty of a given real estate investment. This allows investors to measure the probability that a given real estate project will be profitable. In the example provided the probability of earning a profit after financing and tax is approximately 99% For an investor who has a 90%profitability cutoff probability this project would be accepted.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | real estate investment, risk, probability, discounted cash flow |
| Index terms: | investor, net present value, probability distribution, profitability, income, real estate, profit, discounted cash flow, real estate investment, stream, financing, preference |
| Subjects: | decision-making and reasoning, financial analysis, economic analysis, water management, statistical analysis, sociology, real estate economics |
| Topics: | Procurement, Sustainability, Cost Management, Business Strategy, Research Practice, Stakeholder Management, Urban Studies |
| Descriptive scope: | 3 PCA |
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