The way in which volatility is applied will always be a trade-off between insight and accuracy.

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It is possible to treat volatility as a complex variable, and analytically this may have advantages. However if the user fails to identify with this in the overall picture, it may lose some of its advantage.

This analysis may be used to generate net cash flows and evaluate the risks attached to both the cash flow and the asset value for CRE. This will be of interest to anyone connected to CRE, from the tenant to the investor. As lease events usually represent the primary source of risk, the lease structure is used as the foreground component for this analysis. Tenant default may also become important if its probability starts to approach that of the other lease events present. The background component is determined by changes in ERV, inflation, market values and other factors, and defines the economic environment in which the lease operates.

Crucial Analytics and

Commercial Real Estate

​Lease Level Modelling

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CRE portfolios are modelled at lease level.

 

This is the level at which risk is most easily defined, and most easily controlled by the asset manager.

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Risk evaluation from outputs.

 

Outputs from the model represent the key values of interest (net cash flow, CV, returns, yields, IRR). The risk is linked directly to the scatter in each of these values. Risk evaluation is based on the impact of a range of events combined with the probability that those events will occur. Both of these factors are essential in this calculation.