SENSITIVITY ANALYSIS AND SIMULATION - THEIR APPLICATIONS IN REAL ESTATE ANALYSIS

Abstract

The current practice of real estate analysts and investors in Singapore in adjusting for perceived risk arising from management's uncertainty over the parameters involved in development and investment appraisal, although generally accepted, has proven inadequate. More sophisticated methods of analysis have long been developed in the fields of corporate finance and capital budgeting and with the Republic's progress into the era of computers have great potential in being incorporated into the field of real estate analysis. This dissertation therefore seeks to examine two of these techniques namely, sensitivity analysis and simulation with a view of giving an insight into the techniques, their applications, usefulness and limitations. To achieve this aim, the pre development financial analysis of a development project was used to illustrate the incorporation of the techniques in development appraisal. The uncertainty relating to the parameters involved in real estate development and investment appraisal are also examined to further enhance an appreciation of the techniques.