Monte Carlo simulation in a financial strategy for urban development using land value capture

DOIhttps://doi.org/10.1108/JPIF-03-2019-0032
Pages405-415
Published date10 May 2019
Date10 May 2019
AuthorDavid M. Vetter,Marcia Vetter
Subject MatterProperty valuation & finance,Property management & built environment
Monte Carlo simulation
in a financial strategy for
urban development using
land value capture
David M. Vetter and Marcia Vetter
David Vetter Consulting, Rio de Janeiro, Brazil
Abstract
Purpose The purpose of this paper is to explore how Monte Carlo Simulation (MCS) could have enhanced
understanding of the risks involved in the financial strategy for revitalization of Rio de Janeiros central city
based on the capture of value generated by government interventions.
Design/methodology/approach The study first describes the process involved in developing the
financial strategy and model without MCS. Then, it shows how the MCS could have been integrated into this
process and evaluates its potential impacts on the quality of risk analysis.
Findings If MCS is fully integrated into the decision-making process, it can serve as a heuristic tool that
helps team members to better understand risks by generating forecasts of land value and other variables as a
probability distributions. By showing the variance of the forecasted variable, MCS integrates elements of
modern risk analysis into financial model development in a cost-effective manner.
Research limitations/implications MCS covers only the risks associated with the variables in the financial
model. Events that seem extremely unlikely (i.e. black swans) can occur and must be assessed separately.
Practical implications MCS can help analysts to understand the financial risks of large-scale
development projects involving value capture, even in the prefeasibility stage.
Social implications By facilitating value capture, MCS could help close the financing gap for sustainable
urban development and subsidies for lower income families.
Originality/value The study retrofitsMCS on a successfully completed financial prefeasibility study to
assess its usefulness as a heuristic tool.
Keywords Monte Carlo simulation, Financial model, Risk assessment, Urban development,
Land value capture, Scenario analysis, Rio de Janeiro, Brazil
Paper type Research paper
Introduction
Could the real estate value generated by public interventions (infrastructure investments,
zoning and other regulatory changes) help finance the Revitalization Plan for the Central
Area of Rio de Janeiro (hereafter, Center Plan)? This was a key question for the team charged
with preparing the financial strategy for the Center Plan in 2008.
Technical difficulties in the assessment of property valorization caused by these interventions
can impede the use of value capture instruments resulting in a public-private conundrum
in which the private sector appropriates the benefits (Lungo and Smolka, 2005). Could Monte
Carlo Simulation (MCS) have enhanced the planning teams understanding of the risks involved
in forecasting this valorization for the financial strategy for the Center Plan? If so, MCS could
help other national, state and municipal governments to finance the infrastructure needed for
sustainable development by capturing the value created by their interventions, as advocated by
many authors, including Shoup (1994), Peterson (2009), Smolka (2013) and Blanco et al. (2016).
Journal of Property Investment &
Finance
Vol. 37 No. 4, 2019
pp. 405-415
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-03-2019-0032
Received 12 March 2019
Accepted 4 April 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
The authors thank Instituto Municipal de Urbanismo Pereira Passos (IPP), LAtelier Parisien d
Urbanisme (APUR), Lincoln Institute of Land Policy and all the members of the planning team for their
support during the preparation of the plan for Rios center and the following study in 2008 and 2009.
The analysis and recommendations presented in the paper do not necessarily reflect the ideas and
policies of these institutions or professionals.
405
MCS in a
financial
strategy

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