Conceptual Framework for Real Estate Transactions: What Risk Metrics Are Needed As Decision Support System? Considerations for German Market Participants

Abstract

Purpose – The purpose of this paper is the development for a conceptual framework with regard to the risk management of real estate positions as foundation for transaction decisions. In this context, the current market environment and legal obligations are the main drivers for market participants to improve their risk management practices. Based on this environment, a practical but science backed model is outlined.

Design/methodology/approach – The paper uses a conceptual approach based on the existing literature to develop a practical decision support system. In addition, the current risk management best practices are outlined to illustrate the corporate and methodological foundation for the decision support system.

Findings – The conceptual model development reveals a clear necessity for the supplementation of price to value measures. Additional measures are derived from theoretic considerations based on Monte Carlo Simulation approaches to the risk management of property investments. These additional risk metrics support investors in order make risk-appropriate decisions.

Practical implications – The resulting decision support system can be applied to the risk management of transaction decisions. Here, the model can be applied in any investment decision to support portfolio management considerations from a comprehensive risk management perspective. Investors can implement the system as part of their transaction procedure.

Originality/value – The existing body of literature mainly focuses on macroeconomic ratios in the context of decision support. In contrast, the present paper reveals a corporate decision support system, which is supposed to foster decisions of market agents especially with regard to potential price and value divergences and tightening legal obligations.