Accounting for Seismic Risk in Financial Analysis of Property Investment

Abstract

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 demonstrated using some results from a seven-storey reinforced-concrete hotel in Los Angeles.