![]() We obtained the time series of the cash flows generated by the investment under investigation by implementing a simulation-based approach. ![]() Firstly, we constructed the time series from 1995 to 2015 of the expected and observed internal rates of return of investments in the residential sector. Using a simulation-based approach, the gap between the observed internal rate of return, estimated ex post on the basis of the actual trend of the parameters that influence investment returns, and the expected internal rate of return, calculated ex ante on the basis of the information available at the time of the investment decision. The main objective of this work is to investigate the accuracy and robustness of the estimates of real estate investors of the expected returns on an urban development project in a medium-sized city representative of the North East of Italy. Since the subprime mortgage crisis that broke out at the end of 2006 in the United States, it has clearly emerged that, in a sector that represents about a third of world wealth, it is necessary, on the one hand, to implement proper and increasingly sophisticated valuation tools, to support the design of effective risk management strategies and, on the other hand, to improve the reliability of real estate data, in order to allow for a more robust verification of the hypotheses on the trend of the cash flows generated by the investment and a more accurate valuation of the investment risk and, consequently, of the project expected rate of return. The real estate market is affected by great uncertainty due to the nexus of various factors: a) the specificity of the assets traded, which are illiquid, unique and very hetherogeneous from each other b) the ‘structural disequilibrium’ of the market caused by the differences emerging in elasticity of supply with respect to demand c) the non-competitiveness of the market, which often turns into a bilateral monopoly d) the great variability of market prices.
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