Risk ratios for market variability
Our analysis is done based on the simulation of future market developments. Risk ratios are calculated using a statistical procedure from the simulation results. For example, the width of the distribution of simulated cash flow provides insight into the risk of the future developments. This allows, for example, the quantification of risk by variance or confidence intervals. A narrow distribution allows inferences about a stable appraisal while a wide distribution indicates a large amount of uncertainty.
By using Value-at-Risk (VaR), you can determine the potential loss of value in a risk position. In addition, you can also calculate the standard deviation. The relative ratio for the mean value provides information on the stability of the cash flow to be expected, and forms a basis to plan liquidity as well as calculate provisions.
When we talk about scenario risks, we mean the change in an investment‘s value when one or more input parameters are modified. For example, you can examine how the value of real estate changes when interest rates and expected inflation increase simultaneously.
Risk scenarios can be freely defined and selected. Creating a scenario is done either by manually inputting parameters or an automatic configuration based on fixed defaults. The settings can be selected on the portfolio level or individually for properties.
Sensitivities can be calculated for various drivers, and as such, you can view the influence of single input parameters on the overall results.
The methodology that we employ to conduct the quantitative and qualitative analyses of real estate, real estate portfolios or real estate companies is based on a unique simulation technique. This technique maps macro-economic factors with cash flows specific to a property in a deterministic manner or simulates these in a stochastic manner.
We generate a large number of simulations for potential market developments. The factors for real estate are connected to the respective market drivers. In doing so, we form a basis upon which we are able conduct statistical evaluations for future real estate cash flows.
By distributing the results of the simulations, we are able to determine values and perform a risk analysis. All drivers underlying the model can be examined for specific risks and opportunities.
The developments of software RealEstimate are financed by the Programme for the Future–Economy.
For the period 2007 – 2013, the Programme for the Future – Economy – comprises roughly EURO 662.3 m. for economic and regional promotion in Schleswig-Holstein, thereof ca. EURO 374 m. out of the European Regional Development Fund (ERDF), ca. EURO 208 m. out of the Federal/State Joint Agreement “Improvement of Regional Economic Structures” (GRW) and complementary State Funds of ca. EURO 80.3 m.