Effect of Seismic Risk on Lifetime Property Value (original) (raw)
Related papers
Accounting for Seismic Risk in Financial Analysis of Property Investment
2002
A methodology is presented for making property investment decisions using loss analysis and the principles of decision analysis. It proposes that the investor choose among competing investment alternatives on the basis of the certainty equivalent of their net asset value which depends on the uncertain discounted future net income, uncertain discounted future earthquake losses, initial equity and the investor’s risk tolerance. The earthquake losses are modelled using a seismic vulnerability function, the site seismic hazard function, and an assumption that strong shaking at a site follows a Poisson process. A building-specific vulnerability approach, called assembly-based vulnerability, or ABV, is used. ABV involves a simulation approach that includes dynamic structural analyses and damage analyses using fragility functions and probability distributions on unit repair costs and downtimes for all vulnerable structural and nonstructural components in a building. The methodology is demo...
Real estate investment in seismically active regions: Feasibility assessment and decision making
AFRICAN JOURNAL OF BUSINESS MANAGEMENT, 2012
Lots of major cities worldwide are located in the seismically active regions. Due to natural disasters, the profits of real estate investment in these regions may be corroded. This study proposed a reliability-based decision making process for real estate investment in seismically active regions. Based on the Monte Carlo simulation technique with net present value (NPV) as the indicator, a sampling process was repeatedly performed to construct the relation curves of annual rate of return versus corresponding reliability for candidate investment projects. Then, these curves were used as a tool to prioritize the projects and make decisions. An example to demonstrate the decision making process and illustrate how to effectively estimate potential costs to repair earthquake damages was presented.
SEL versus SUL: managing seismic risk in commercial real estate investments
The Structural Design of Tall and Special Buildings, 2010
Two common scenario loss ratios are used when calculating Probable Maximum Losses from earthquakes: Scenario Expected Loss (SEL) and Scenario Upper Loss (SUL). Analyses of seismic loss ratios prepared by fi ve seismic consulting fi rms, four loan pools securitized in the capital markets, two very large loans with many properties, two large hospitality portfolios and a general account portfolio indicate that use of SUL rather than SEL would yield signifi cantly larger numbers of loans with loss ratios in excess of 20%. When using SEL, the percentage of loans in the four large pools exceeding a 20% loss ratio was 3.8%. When SUL was used on this same data set, 47.8% of these properties had SUL values above 20%. Common industry practice has been to use SEL. Some of the implications of tightening seismic underwriting standards to apply a 20% threshold to the SUL, rather than SEL, may include: lower loan production, properties may lose value, properties may be costlier and more diffi cult to fi nance, existing loan portfolios may appear more seismically risky, and demand for insurance and seismic retrofi t could go up. Equally undesirable effects could be that seismic consultants and lenders who do more rigorous analysis will be less competitive than those who do not.
Sensitivity of Building Loss Estimates to Major Uncertain Variables
Earthquake Spectra, 2002
This paper examines the question of which sources of uncertainty most strongly affect the repair cost of a building in a future earthquake. Uncertainties examined here include spectral acceleration, ground-motion details, mass, damping, structural force-deformation behavior, building-component fragility, contractor costs, and the contractor's overhead and profit. We measure the variation (or swing) of the repair cost when each basic input variable except one is taken at its median value, and the remaining variable is taken at its 10th and at its 90th percentile. We perform this study using a 1960s highrise nonductile reinforced-concrete moment-frame building. Repair costs are estimated using the assembly-based vulnerability (ABV) method. We find that the top three contributors to uncertainty are assembly capacity (the structural response at which a component exceeds some damage state), shaking intensity (measured here in terms of damped elastic spectral acceleration, Sa), and de...
Simplified Estimation of Economic Seismic Risk for Buildings
Earthquake Spectra, 2004
A seismic risk assessment is often performed on behalf of a buyer of commercial buildings in seismically active regions. One outcome of the assessment is that a probable maximum loss ( PML) is computed. PML is of limited use to real-estate investors as it has no place in a standard financial analysis and reflects too long a planning period. We introduce an alternative to PML called probable frequent loss ( PFL), defined as the mean loss resulting from shaking with 10% exceedance probability in 5 years. PFL is approximately related to expected annualized loss ( EAL) through a site economic hazard coefficient (H) introduced here. PFL and EAL offer three advantages over PML: (1) meaningful planning period; (2) applicability in financial analysis (making seismic risk a potential market force); and (3) can be estimated using a single linear structural analysis, via a simplified method called linear assembly-based vulnerability (LABV) that is presented in this work. We also present a simp...
Real Estate Economics, 2000
Neoclassical investment decision criteria suggest that only the systematic component of total uncertainty affects the rate of investment, as channeled through built asset price. Alternatively, option-based investment models suggest a direct role for total uncertainty in investment decision making. To sort out uncertainty's role in investment, we specify and empirically estimate a structural model of asset market equilibrium. Commercial real estate time series data with two distinct measures of asset price and uncertainty are used to assess the competing investment models. Empirical results generally favor predictions of the option-based model, and hence suggest that irreversibility and delay are important considerations to investors. Our findings also have implications for macroeconomic policy and for forecasts of cyclical investment activity.
Risks Assessment in Real Estate Investments in Times of Global Crisis
Aim of the paper is to provide a novel valuation model to address risk and uncertainty in property investment decisions. When the future is uncertain and investments are durable and illiquid, the decision to invest at a certain point in time and the correct assessment of risks are key issues. In times of global financial crisis, investors need to know how to measure risks and identify the relationship between risks borne and risk premiums demanded. Increases in idiosyncratic and systematic risk lead developers to abandon/delay investments because de facto they feel not confident in projects riskiness and market values assessed by professionals. Risks evaluation is often left to the sensitivity and discretion of valuers. Rigorous risk assessment measures, based on mathematical algorithms, are here presented. We provide an operational framework to address risk and uncertainty by an integrated approach that can be easily understood by third parties and applied to different property types. The algorithms here proposed allow investors to evaluate risks and opportunities taking into consideration all the different phases of property investment projects and related risks. Investors, with different time patterns of income and desired consumption, will be therefore enabled to determine the risks they can tolerate, the return they need and its timing.
Impacts of the property investment market on seismic retrofit decisions
Building an Earthquake-Resilient Society: Proceedings of the Ninth Pacific Conference on Earthquake Engineering, 2011
Implementing seismic risk mitigation is a major challenge in many earthquake prone regions. The objective of this research is to investigate how property investment market practices can be used to enhance building owners' decisions to improve seismic performance of earthquake prone buildings (EPBs). A case study method adopted, revealed the impacts of the property market stakeholders' practices on seismic retrofit decisions. The findings from this research provide significant new insights on how property market-based ...
Does the risk match the returns: an examination of US commercial property market data
24th Annual European Real Estate Society Conference
Evidence from the US Commercial property market suggests periods of extended stable performance are generally followed by large concentrated price fluctuations. This extreme volatility may not be fully reflected in traditional risk (standard deviation) calculations. This research studies 38 years of NCREIF commercial property market performance data for normal distribution features and signs of extreme downside risk. Methodology covers the recognised Z Test and the fractal geometry, Cubic Power Law instrument. For the reporting of annual returns on quarterly figures, the industry preferred investment performance measure, the results showed the data to be both asymmetric, and being taller and narrower than a normal bell curve distribution with fat dumb bell downside tails at the perimeter. In highlighting the challenges to measuring commercial property market performance, the research revealed a better analysis of extreme downside risk is by a Cubic Power Law distribution model, being a robust method to identify the performance of an investment to the vulnerabilities of serve risk. Modelling techniques for estimating measures of tail risk provide challenges and have shown to be beyond current risk management practices, being too narrow and constraining approach.