Selection of the Optimal Real Estate Investment Project Basing on Multiple Criteria Evaluation Using Stochastic Dimensions

Article excerpt

1. Introduction

Investments in real estate sector exist in all the life cycle stages of the economy. Micro- and macroenvironment determines the risk levels and complexity of projects realization. Generally investors--private individuals, corporations or investment funds--are solving the problem how to use current resources to gain the maximum benefits from the investments. Thus, each investor considers the problems of alternative projects selection, investment resources allocation, real estate value development, maintenance and enhancement. Different authors, analyzing investments and investments' assessment, propose various methods of investment projects evaluation. They can be categorized as financial, risk assessment, multiple criteria evaluation and other methods. Each of these methods has particular advantages and disadvantages; indeed the unified algorithm of investment evaluation is still not developed.

The main purpose of this article is to develop the improved algorithm for real estate investment projects' efficiency evaluation. Basing on this algorithm, projects developers and valuators will be able to determine the efficiency of real estate investment projects in accordance to investor's needs and to set projects' priorities list basing on their efficiency level.

The selection of appropriate model and methods can solve the problem of risk and uncertainty management in investment decision-making. This will guide to correct real estate investment directions and will lead to higher real estate investments quality as well as to value enhancement.

2. The algorithm for real estate projects' investment decisions evaluation

Basing on the analyzed investment decisions evaluation methods, their advantages and disadvantages, the algorithm of real estate investment decisions evaluation was created (Fig. 1). On the basis of this algorithm, projects' developers and valuators can estimate the efficiency of the investment projects, investor's requirements satisfaction level as well as to set projects' efficiency priorities.

The proposed algorithm allows to make real estate investment projects' efficiency evaluation and to form their priorities list basing on the hierarchically-structured system of qualitative and quantitative evaluation criteria by using the complex multiple criteria risk and efficiency evaluation method.

Real estate projects' efficiency evaluation process consists of 7 main stages to be implemented by interested in efficiency evaluation and projects' comparison stakeholders groups (e.g. customers, developers, investors):

* Stage 1. Identification of investor's targets and purposes;

* Stage 2. Projects' selection (Initial projects' data gathering);

* Stage 3. Determination of projects' parameters;

* Stage 4. Analysis and comparison of the parameters;

* Stage 5. Multiple criteria evaluation of projects' efficiency;

* Stage 6. Conclusions and recommendations about projects' efficiency;

* Stage 7. Investment decision-making.

The presented evaluation model involves the whole cycle of investment decision-making--from the investor's targets and purposes identification to the final investment decision-making. The above mentioned stages are discussed further.

[FIGURE 1 OMITTED]

The initial stage is to identify investor's targets and restrictions. Investment is influenced by various factors: tax rates, inflation level and cash flow; and the main participants are: investors, hypothec suppliers, renters, government, final real estate users, etc.

In this stage primal ideas are also considered, and the ideas which obviously can not be realized or are unprofitable are eliminated. Initial ideas selection process is performed basing on the general criteria: preliminary price of the project (both economic and social), demand for the project's product, guarantees, risk, raw materials price, etc. …