||LONG-TERM INFLATION HEDGING PROPERTIES OF DIRECT REAL ESTATE INVESTMENT: A METHODOLOGY TO STUDY INFLATION’S PROTECTION GIVEN THE LEASE STRUCTURE AND THE INDEXATION USES
||Amedee-Manesme, Charles-Olivier; Baroni, Michel; Dupuy, Etienne
||This study suggests a model to analyze the inflation’s hedging characteristics of direct real estate investments taking into consideration the lease structure, the indexation’s typology and the current and forecasted state of the market. Using both Monte-Carlo simulations for the price of the assets and the market rental values and options for the tenant’s behavior, we afford to study inflation’s protection of any direct real estate investment given the current and the forecasted state of the market. In particular we are able to study the risk possibly incurred by this protection by studying the possible reversion of the indexed rents. The model uses Monte-Carlo simulations to measure differences between simulated market rental values and indexed rents and analyses the impact of this evolution to the tenant’s behavior. Our model makes one able to study how this behavior impacts the cash flows paths distribution and consequently the likely inflation’s protection. More specifically, one is able to determine according a predicted future evolution of the market if the indexation’s methodology will weaken or not the lease. This paper innovates by making possible a comparison of all the leases’ properties at the hands of inflation’s hedging. After a brief review of literature on inflation’s hedging and particularly on real estate inflation protection features, the paper describes the suggested model. We focus on tenant’s behavior regarding the state of the market and regarding its lease and how this behavior influenced the inflation’s hedging protection. We conclude by a comparison of some of the major European lease structure.
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||Monte-Carlo Simulations, Inflation, Hedging, Leases, Direct real estate, Rents indexation, Portfolio Allocation, Options
Amedee-Manesme, Charles-Olivier; Baroni, Michel; Dupuy, Etienne (2010).
LONG-TERM INFLATION HEDGING PROPERTIES OF DIRECT REAL ESTATE INVESTMENT: A METHODOLOGY TO STUDY INFLATION’S PROTECTION GIVEN THE LEASE STRUCTURE AND THE INDEXATION USES. 17th Annual European Real Estate Society Conference in Milan, Italy,