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| On the Use of a Cash Flow Time-Series to
Measure Property Performance Author: Jesse M. Abraham Start Page: 291 Abstract: Modern portfolio
theory is increasingly being used to guide real estate portfolio decisions. However, to
obtain meaningful results from complex mathematical techniques, the input data must meet
at least two conditions: property values must be measured accurately, and the process by
which property valuations change over time must be known. Neither of these conditions are
satisfied by data currently available. This paper closely examines how value is
measured and reported for commercial property. Commonly used time-series from NREI, NCREIF
and ACLI are found wanting. An index of value using the popular "repeat sales"
method is derived using data from Freddie Mac's multifamily portfolio. The focus of
this paper is on developing an alternative measure of property performance based on
property net operating income. Two cash flow indices are constructed from publicly
available data and evaluated. It is recommended that the methodology developed here be
used to create cash flow indices that can supplement or replace existing value indices in
property analysis. The cash flow indices have much to offer researchers applying
option-based models to real estate. |
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