Glossary

Value at Risk (VaR)

Also known as: Portfolio Value at Risk, VaR

A statistical estimate of the maximum expected loss in portfolio value over a defined time horizon at a given confidence level — for example, a 95% one-year VaR of $20 million implies a 5% probability of losing more than $20 million over the following year — applied to real estate portfolios using historical or simulated return, volatility, and correlation inputs.

VaR was developed for liquid, frequently priced securities portfolios, and applying it to real estate requires care because appraisal-based, infrequently updated return data tends to understate true volatility and correlation (see appraisal smoothing), which can produce an artificially low VaR estimate unless the underlying data is statistically unsmoothed before the calculation. VaR also has a well-known structural limitation regardless of asset class: it estimates the threshold loss at a given confidence level but says nothing about the potential magnitude of loss beyond that threshold, which is why institutional risk management pairs VaR with stress testing and scenario analysis rather than relying on it as a standalone risk measure. This general portfolio VaR concept should be distinguished from Climate Value-at-Risk, which adapts the same probabilistic framing specifically to physical and transition climate risk exposure rather than to general market and valuation risk.