Optimal holding period for a real estate portfolio

Baroni, Michel; Barthélémy, Fabrice; Mokrane, Mahdi

doi:10.1108/14635780710829306

Cited by 11 publications

(25 citation statements)

References 17 publications

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“…Following Baroni et al (2007), we suppose that the price dynamics follows a geometric Brownian motion:…”

Section: Continuous-time Modelmentioning

confidence: 99%

“…The model is built up on previous work. First, we determine the optimal holding period when it has to be chosen at initial date, extending previous results of Baroni et al (2007). The investor is assumed to know probability distribution of real estate asset.…”

Section: Introductionmentioning

confidence: 98%

“…3 Many attempts have sought to develop models to determine optimal holding period for real estate portfolio. 4 Baroni et al (2007) determine the optimal holding period ex-ante (e.g. for closed funds, when the initial investment is realized).…”

Section: Introductionmentioning

confidence: 99%

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Real estate investment: Market volatility and optimal holding period under risk aversion

2016

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This paper deals with real estate portfolio optimization when investors are risk averse. In this framework, we examine an important decision making problem, namely the determination of the optimal time to sell a diversified real estate portfolio. The optimization problem corresponds to the maximization of a concave utility function defined on both the free cash flows and the terminal value of the portfolio. We determine several types of optimal times to sell and analyze their properties. We extend previous results, established for the quasi linear utility case, where investors are risk neutral. We consider four cases. In the first one, the investor knows the probability distribution of the real estate index. In the second one, the investor is perfectly informed about the real estate market dynamics. In the third case, the investor uses an intertemporal optimization approach which looks like an American option problem. Finally, the buy-and-hold strategy is considered. For these four cases, we analyze in particular how the solutions depend on the market volatility and we compare them with those of the quasi linear case. We show that the introduction of risk aversion allows to better account for the real estate market volatility. We also introduce the notion of compensating variation to better measure the impacts of both the risk aversion and the volatility.

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“…Following Baroni et al (2007), we suppose that the price dynamics follows a geometric Brownian motion:…”

Section: Continuous-time Modelmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 98%

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Real estate investment: Market volatility and optimal holding period under risk aversion

2016

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“…This case thus serves as a sort of benchmark. In Baroni et al (2007b), the investor does not know the dynamics, but only knows its probability distribution. The solutions are analyzed by using simulations and quasi explicit formulae.…”

Section: Introductionmentioning

confidence: 99%

“…The structure of the paper is laid out as follows: "Optimal Time T* to Sell, Chosen at Time 0" presents results of Baroni et al (2007b) in a continuous-time framework. "Optimal Time T** to Sell for a Perfectly Informed Investor" provides the analysis of the perfectly informed investor.…”

Section: Introductionmentioning

confidence: 99%

Optimal Time to Sell in Real Estate Portfolio Management

Barthélémy

Prigent

2008

J Real Estate Finance Econ

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The impact of lease structures on the optimal holding period for a commercial real estate portfolio

Amédée‐Manesme

Baroni

Barthélémy

et al. 2015

Journal of Property Investment &Amp; Finance

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The purpose of this paper is to demonstrate the impact of lease duration and lease break options on the optimal holding period for a real estate asset or portfolio. Methodology/approach We use a Monte Carlo simulation framework to simulate a real estate asset's cash flows in which lease structures (rent, indexation pattern, overall lease duration and break options) are explicitly taken into account. We assume that a tenant exercises his/her option to break a lease if the rent paid is higher than the market rental value of similar properties. We also model vacancy duration stochastically. Finally, capital values and market rental values, assumed to be correlated, are simulated using specific stochastic processes. We derive the optimal holding period for the asset as the value that maximises its discounted value. Findings We demonstrate that, consistent with existing capital markets literature and real estate business practice, break options in leases can dramatically alter optimal holding periods for real estate assets and, by extension, portfolios. We show that, everything else being equal, shorter lease durations, higher market rental value volatility, increasing negative rental reversion, higher vacancy duration, more break options, all tend to decrease the optimal holding period of a real estate asset. The converse is also true. Practical implications

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Optimal holding period for a real estate portfolio

Cited by 11 publications

References 17 publications

Real estate investment: Market volatility and optimal holding period under risk aversion

Real estate investment: Market volatility and optimal holding period under risk aversion

Optimal Time to Sell in Real Estate Portfolio Management

The impact of lease structures on the optimal holding period for a commercial real estate portfolio

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