Real estate loan origination and monitoring with a macroeconomic-coherent Monte Carlo approach

Real estate investments are complex and risky for financial institutions. Traditional ways of valuing them, such as discounted cashflows, often don’t account for the risk and uncertainty involved. Quantifi suggests a new approach that uses Monte Carlo simulations of different economic and financial scenarios, and real estate-specific factors. 

This whitepaper introduces a framework and software suite called Real Estate Analytics that makes cashflow estimates for real estate investments under various economic conditions, allowing for a better assessment of real estate projects and their risks. The paper presents a use case of loan structuring and pricing for real estate-backed projects, and how Quantifi’s approach helps optimise risk/return trade-offs by finding optimal loan terms and interest rates. It also provides monitoring metrics from Quantifi’s analysis, which can track investment performance.

The paper aims to show how Monte Carlo simulations based on economic scenarios can improve a sector such as real estate, which can be profitable for banks and other financial institutions, but also very risky.