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| Development of a Dynamic Investment
Strategy under Alternative Inflation Cycle Scenarios Author: Stephen A. Pyhrr, Waldo L. Born, and James R. Webb Start Page: 177 Abstract: Inflation and
inflation cycles have been a major underlying reason for the financial successes and
failures of real estate investors in recent history. These cycles have complex impacts on
cash flow variables and thus on real estate returns and investment values. This study
presents a decision framework and operational model to project investment returns for
alternative inflation cycle scenarios and demonstrates their application for developing a
dynamic real estate investment strategy. Such a strategy provides for portfolio revisions
during different stages of the inflation cycle and assumes that investors seek to maximize
expected "real" rates of return and hence owner's wealth. A probabilistic
discounted cash flow model is designed and used to inflation-adjust each cash flow
variable affected. Mathematical relationships are developed for specifying unique cash
flow variable linkages and sensitivities, with lead and lag periods consistent with
empirical evidence of timing of inflation impacts. Finally strategic implications for
acquisition and disposition policy are discussed. |
