Transferring outranking models to real estate management. The assessment of potential investment markets using PROMETHEE

Publication Date05 March 2018
Pages135-157
DOIhttps://doi.org/10.1108/JPIF-01-2017-0009
AuthorSteffen Metzner
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Transferring outranking models
to real estate management
The assessment of potential investment
markets using PROMETHEE
Steffen Metzner
Department of Real Estate Economics, Bauhaus-Universitat Weimar,
Weimar, Germany and
Institute for Real Estate Management, Universitat Leipzig, Leipzig, Germany
Abstract
Purpose For the purpose of decision-making in real estate portfolio management, alternatives are to be
collected, assessed and prioritized. Due to the complexity of real estate markets, investment products and
management processes, the respective decision situations are subject to several parameters. Multi-criteria
models must be used to exactly evaluate and prioritize alternatives. Such models can be found in other
economic and social areas but must be transferred or re-developed for the purposes of real estate
management. The paper aims to discuss these issues.
Design/methodology/approach The paper includes the transfer of the basic outranking methodology,
the PROMETHEE (Preference Ranking Organization METHod für Enrichment Evaluations) method in
particular, to real estate issues. Methods used outside the real estate industry are analyzed, selected and
adapted by using real estate parameters (transfer approach).
Findings Structured multi-criteria processes such as PROMETHEE are suitable for the solution of complex
real estate selection decisions. The methodology with regard to the respective issues is much more consistent
and efficient. PROMETHEE avoids the restriction of criteria in mathematical calculations and the restriction
of quality in simple scorings.
Research limitations/implications The target system and decision criteria of investors were used
exemplarily. The individual parameters and criteria can lead to new model solutions.
Practical implications Multi-criteria models such as PROMETHEE stringently and transparently solve
complex decision problems and alternative evaluations in real estate portfolio management. They can be
developed for strategic, tactical and operative decision situations. The decision quality and verification for
compliance requirements improve.
Social implications Multi-criteria models such as PROMETHEE can also be developed for social, societal
and political decision situations.
Originality/value First adaption of the outranking procedure PROMETHEE to a real estate decision
situation in market analysis and portfolio management.
Keywords PROMETHEE, Decision support, Outranking, Multi-criteria analysis, Portfolio management,
Real estate investments
Paper type Research paper
1. Decision support models for real estate portfolio management
Institutional real estate investors often have to consider business- or portfolio-related
decisions affecting equity positions as well as income over a long period of time. This paper
is not supposed to discuss decisions that are made frequently and therefore are based on
existing standards. Instead, this paper will focus on rather uncommon real estate-related
decisions having a significant impact on business results, e.g. in the process of an
acquisition or sale of a property. These decisions should be supported by a specific analysis
matching the individual case. Adequate information (collection, planning) as well as the
analysis of the information (consolidation, comparison, prioritization) is the basis for
decision support.
The complexity of real estate markets, real estate investments and operational processes
influence the necessary quality, efficiency and performance of the decision support models.
Journal of Property Investment &
Finance
Vol. 36 No. 2, 2018
pp. 135-157
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-01-2017-0009
Received 30 January 2017
Revised 29 April 2017
Accepted 10 May 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
135
Real estate
management
In order to make a rational and transparent decision, key performance indicators (KPI),
rankings or classifications are required.
There are a number of models that are able to exactly evaluate and clearly prioritize the
respective decision alternatives by analyzing and preparing data for decision support.
Decisions regarding the real estate investment strategy as a whole or a single real estate
investment in particular are usually based on several criteria. According to the number
of criteria relevant to decision-making, it is possible to distinguish between mono-criteria
(e.g. yield comparison), bi-criteria (e.g. risk-return ratio) as well as multi-criteria models
(e.g. outranking) (Figure 1).
2. Multi-criteria decision models as extension of the mathematical perspective
The further development of real estate decision models is enabled by transferring and
specifying multi-criteria models. Alongside mono-criteria models (e.g. comparison of yields,
comparison of present value) and bi-criteria models (e.g. yield-risk pairs in the Markowitz
model), this group represents a third option to further develop models for decision-making
(Metzner, 2013, p. 141). The subgroup of outranking in particular focuses on stringent
structuring, arrangement and prioritization of complex selection alternatives. The latter are
thus to be preferred in the context of complex decision situations. However, they are
virtually unknown in the real estate environment (Metzner, 2013, p. 301).
Multi-criteria models ( Multi-Criteria Decision -Making) serve the evaluation and
support of decision situations subject to parallel objectives and/or numerous parameters
(Hwang and Yoon, 1981, p. 1). This leads to typical framework conditions of multi-criteria
decision problems (Zimmermann and Gutsche, 1991, p. 21f):
Several decision criteria and diverse alternatives for solving problems exist.
Every alternative must be evaluated based on the relevant criteria. This results in a
certain degree of goal achievement (e.g. different location factors).
There often are criteria conflicts the improvement of one KPI results in the
deterioration of another KPI (e.g. yields and risk, centrality and property costs).
Different survey methods and units are to be considered and must potentially be
united (e.g. location rating and financial result).
Mono-criteria models
Evaluation and decision models
Static
investment appraisal
Dynamic
investment appraisal
Bi-criteria models Multi-criteria models
Other criteria
e.g. area, quality
Target return with risk
as secondary condition
Risk-adjusted
return
Efficient risk-return
combinations
Specific ratio and
value key figures
Source: Own research
Simple checklists
and scoring
Multi-objective-
decision-Making
Multi-Attributive-
decision-Making
Figure 1.
Systematization of
potential models for
decision support
136
JPIF
36,2

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