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Question:
As a property analyst, you are required to carry out an investment analysis report for your client who has an opportunity to purchase an income-producing property in Sydney.
 
You must identify an income-producing property and obtain the information for the property. You could utilise the information from the 1st assignment.

Answer:
Introduction

There are various income producing properties that generates income to the owner and serve the need of the tenant. Frankly, speaking there are generally two sources:-

  • Letting out the property for rent to individuals, companies or other for the purpose of continuous revenue generation in the form of rent;
  • The second source being capital appreciation of the property over the period of holding. 

Generally, the fixed income generating assets provide a stable return to the owner and is less risky compared to other sources of investment except government securities. However, they also come with their cup of risk in the form of non occupancy, global prices fall in real estate value etc. Principally, the following are primarily the revenue generating assets under fixed real estate investment:

  • Commercial properties for let out of office spaces. The same has been considered for analysis by considering the data available for Sydney;
  • Retail in the form of road side shops or mall shopd;
  • Industrial space let out;
  • Warehousing let outs;
  • Other ancillary properties let out. 
  1. Purpose of Assignment

The general intent of the paper is to carry out investment analysis for income generating property. The tools used in the analysis has been named here-in-below:

  • Discounting Cash Flows;
  • Net Present Value Method;
  • Internal Rate of Return;
  • Case Scenario;
  • Profit After Tax Analysis.
  1. Assumptions undertaken

The following are the assumptions undertaken for the analysis:

  • The let out property is situated in Sydney, Australia;
  • The property is Official;
  • The Value of property is 20,00,000/- AUD;
  • Loan to Value Ratio is 70%;
  • Discounting Factor or rate is taken as opportunity cost of debt i.e. 6.5%;
  • Period of analysis is 10 years;
  • Inflation is 2.2%;
  • Growth in the value of rent is 4%;
  • Terminal growth rate is 7%;
  • Ask value for the property is 28,54,757/- AUD;
  • Best case and worst Case scenario sale values;
  • Loan is taken at 6.5%
  • Repayment of loan is 10 years 
  1. Key Terms 
  • Net Present Value: It is an investment analysis tool under which the cash inflows and outflows are discounted using a factor generally an opportunity cost of capital. Post discounting, the inflow is deducted from outflow to analyse the feasibility of the project. A positive NPV exhibits green signal while a negative exhibits red. 
  • Internal Rate of Return: It is also an investment analysis tool under which the outflow is matched to inflow using a rate of return that exactly tallies outflow to inflow. If the rate of IRR is greater than the rate specified in the discounting factor the project is feasible otherwise not. 
  • Discounting Factor:It is a rate at which the cash flows are discounted in the simulation. It generally represents the opportunity cost of capital or the expected rate of return. 
  • Scenario Analysis:The scenario analysis is a significant tool in analysing the impact of positive and negative outcome on the viability of project. It is a significant tool is decision making and helps to analyse before the losses that company can incur on account of negative market scenario. 
  • Profit After Tax:The  same is computed post taking into account the expensed incurred for earning the profits except repayment of principal.
PART 2: Investment Analysis 

The analysis has been based on the following:

  • Income producing property in Sydney;
  • Rise in rent price by 4% p.a.
  • Inflation rate is 2.2%;(Economics)
  • Property size is 1000 Sq metres;
  • Property purchase rate is 2000 per Sq metres;(Commercial Properties For Lease in Sydney, NSW 2000)
  • Expenditure is 25% of rent;
  • Rate of discounting is 6.5%;
  • Terminal yield is 7%.(Portal, 2018) 

Tenancy Schedule

(Amount in AUD)

Sl no

Year

No of Months

Rent to be paid

1

1

12

180000

2

2

12

187200

3

3

12

194688

4

4

12

202476

5

5

12

210575

6

6

12

218998

7

7

12

227757

8

8

12

236868

9

9

12

246342

10

10

12

256196

Out Going Schedule

Sl No

Particulars

Expense (% of Income)

1

Property Tax

25%

2

Fire Insurance

3

Repairs

4

Maintenance

5

Cost of securing tenant

6

Management fees or supervisory fees

7

Depreciation towards furniture and fittings

8

Utility expense

   (Rental Income and Expenses, 2018)

Discount Rate Computation

Sl No

Particulars

Rate

1

Prime residential mortgage rate

4%

2

Premium

2%-2.5%

3

Rate for discounting

6.50%

 

Sl No

Particulars

Rate

1

RF

3.50%

2

Premium

2.5%-3%

3

Rate for discounting

6.50%

   (5 tips for financing your first commercial property loan, 2016)

Terminal Yield

Sl No

Particulars

Rate

1

Going Rate

6.50%

2

Additional Premium in terms of slide 49

0.50%

3

Terminal Rate

7.00%

 

Projection of Cash flows on property

Sl no

Square Metre

Rent per Square Metre

Amount

Proposed Expenditure (25% of earning)

Net Amount

Discounting Rate 6.5%

Amount after discount

1

1000

180

180000

45000

135000

0.9390

126761

2

1000

187

187200

46800

140400

0.8817

123785

3

1000

195

194688

48672

146016

0.8278

120879

4

1000

202

202476

50619

151857

0.7773

118042

5

1000

211

210575

52644

157931

0.7299

115271

6

1000

219

218998

54749

164248

0.6853

112565

7

1000

228

227757

56939

170818

0.6435

109922

8

1000

237

236868

59217

177651

0.6042

107342

9

1000

246

246342

61586

184757

0.5674

104822

10

1000

256

256196

64049

192147

0.5327

102362

11

1000

266

266444

66611

2854757

0.5327

1520803

 

 

 

 

 

 

Discounted cash inflow

2662554

 

 

 

 

 

 

Out flow

2000000

 

 

 

 

 

 

NPV

662554

 

 

 

 

 

 

IRR

10%

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 10% which exceeds the discounting rate and hence the company can go for the project.

PART -3 (A) 

 The PART 3 A of the analysis includes debt financing and the following are the key factor apart from PART 2 for analysis purpose:

Particulars

Briefs

VALUE OF PROPERTY ( Asking Price)

2000000

Loan to Value Ratio

70%

Loan

1400000.00

Equity

600000.00

Interest

6.5% p.a

Yearly repayment of loan

194747.00

Resale value

2854757

Tenancy Schedule

Sl no

Year

No of Months

Rent to be paid

1

1

12

180000

2

2

12

187200

3

3

12

194688

4

4

12

202476

5

5

12

210575

6

6

12

218998

7

7

12

227757

8

8

12

236868

9

9

12

246342

10

10

12

256196

 

Outgoing Schedule

Sl No

Particulars

Expense (% of Income)

1

Property Tax

25%

2

Fire Insurance

3

Repairs

4

Maintenance

5

Cost of securing tenant

6

Management fees or supervisory fees

7

Depreciation towards furniture and fittings

8

Utility expense

 Discounting Rate Computation

Sl No

Particulars

Rate

1

Prime residential mortgage rate

4%

2

Premium

2%-2.5%

3

Rate for discounting

6.50%

 

Sl No

Particulars

Rate

1

RF

3.50%

2

Premium

2.5%-3%

3

Rate for discounting

6.50%

Loan Schedule 

Sl No

Particulars

Opening Amount

Interest

Repayment

Closing

1

Loan

1400000.00

91000

194747

1296253.00

2

Loan

1296253.00

84256.445

194747

1185762.45

3

Loan

1185762.45

77074.55893

194747

1068090.00

4

Loan

1068090.00

69425.85026

194747

942768.85

5

Loan

942768.85

61279.97552

194747

809301.83

6

Loan

809301.83

52604.61893

194747

667159.45

7

Loan

667159.45

43365.36416

194747

515777.81

8

Loan

515777.81

33525.55783

194747

354556.37

9

Loan

354556.37

23046.16409

194747

182855.53

  

Projection of Cash flows on property

Sl no

Square Metre

Rent per Square Metre

Amount

Proposed Expenditure (25% of earning)

Net Amount

Repayment

Net Post Repayment

Discounting Rate 6.5%

Amount after discount

1

1000

180

180000

45000

135000

194747

-59747

0.9390

-56100

2

1000

187

187200

46800

140400

194747

-54347

0.8817

-47916

3

1000

195

194688

48672

146016

194747

-48731

0.8278

-40342

4

1000

202

202476

50619

151857

194747

-42890

0.7773

-33340

5

1000

211

210575

52644

157931

194747

-36816

0.7299

-26871

6

1000

219

218998

54749

164248

194747

-30499

0.6853

-20902

7

1000

228

227757

56939

170818

194747

-23929

0.6435

-15398

8

1000

237

236868

59217

177651

194747

-17096

0.6042

-10330

9

1000

246

246342

61586

184757

194747

-9990

0.5674

-5668

10

1000

256

256196

64049

192147

194742

-2595

0.5327

-1382

11

 

 

 

 

2854757

0

2854757

0.5327

1520803

 

 

 

 

 

 

 

 

Discounted cash inflow

1262554

 

 

 

 

 

 

 

 

Out flow

600000

 

 

 

 

 

 

 

 

NPV

662554

 

 

 

 

 

 

 

 

IRR

13%

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 13% which exceeds the discounting rate and hence the company can go for the project.

PART -3 (B) 

The PART 3 B of the analysis includes scenario analysis and the following are the key factor apart from PART 2 & PART 3(A) for analysis purpose: 

Particulars

Briefs

VALUE OF PROPERTY ( Asking Price)

2000000

Loan to Value Ratio

70%

Loan

1400000.00

Equity

600000.00

Interest

6.5% p.a

Yearly repayment of loan

194747.00

Resale value ( Most likely)

2854757

Best Case

3250000

Worst case

2000000

 

Projection of Cash flows on property (Pessimistic)- Rent falls by 10% every year

Sl no

Square Metre

Rent per Square Metre

Amount

Proposed Expenditure (25% of earning)

Net Amount

Repayment

Net Post Repayment

Discounting Rate 6.5%

Amount after discount

1

1000

180

180000

45000

135000

194747

-59747

0.9390

-56100

2

1000

162

162000

40500

121500

194747

-73247

0.8817

-64579

3

1000

146

145800

36450

109350

194747

-85397

0.8278

-70696

4

1000

131

131220

32805

98415

194747

-96332

0.7773

-74881

5

1000

118

118098

29525

88574

194747

-106174

0.7299

-77494

6

1000

106

106288

26572

79716

194747

-115031

0.6853

-78835

7

1000

96

95659

23915

71745

194747

-123002

0.6435

-79153

8

1000

86

86093

21523

64570

194747

-130177

0.6042

-78657

9

1000

77

77484

19371

58113

194747

-136634

0.5674

-77520

10

1000

70

69736

17434

52302

194742

-142440

0.5327

-75882

11

 

 

0

0

0

0

2000000

0.5327

1065452

 

 

 

 

 

 

 

 

Discounted cash inflow

331656

 

 

 

 

 

 

 

 

Out flow

600000

 

 

 

 

 

NPV

-268344

 

 

 

 

 

 

 

 

IRR

3%

On the basis of above, it may be seen that purchasing of property is not viable under pessimistic view as the net outflow after discounting exceeds the inflow and hence the project is not viable. Further, the IRR of the project is 3% which does not exceeds the discounting rate and hence the company cannot go for the project. 

Projection of Cash flows on property (Optimistic)- Rent increases by 10% every year

Sl no

Square Metre

Rent per Square Metre

Amount

Proposed Expenditure (25% of earning)

Net Amount

Repayment

Net Post Repayment

Discounting Rate 6.5%

Amount after discount

1

1000

180

180000

45000

135000

194747

-59747

0.9390

-56100

2

1000

198

198000

49500

148500

194747

-46247

0.8817

-40774

3

1000

218

217800

54450

163350

194747

-31397

0.8278

-25992

4

1000

240

239580

59895

179685

194747

-15062

0.7773

-11708

5

1000

264

263538

65885

197654

194747

2907

0.7299

2121

6

1000

290

289892

72473

217419

194747

22672

0.6853

15538

7

1000

319

318881

79720

239161

194747

44414

0.6435

28581

8

1000

351

350769

87692

263077

194747

68330

0.6042

41287

9

1000

386

385846

96461

289384

194747

94637

0.5674

53693

10

1000

424

424431

106108

318323

194742

123581

0.5327

65835

11

 

 

0

0

0

0

3250000

0.5327

1731360

 

 

 

 

 

 

 

 

Discounted cash inflow

1803839

 

 

 

 

 

 

 

 

Out flow

600000

 

 

 

 

 

NPV

1203839

 

 

 

 

 

 

 

 

IRR

18%

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 18% which exceeds the discounting rate and hence the company can go for the project.

Projection of Cash flows on property (Most Likely)

Sl no

Square Metre

Rent per Square Metre

Amount

Proposed Expenditure (25% of earning)

Net Amount

Repayment

Net Post Repayment

Discounting Rate 6.5%

Amount after discount

1

1000

180

180000

45000

135000

194747

-59747

0.9390

-56100

2

1000

187

187200

46800

140400

194747

-54347

0.8817

-47916

3

1000

195

194688

48672

146016

194747

-48731

0.8278

-40342

4

1000

202

202476

50619

151857

194747

-42890

0.7773

-33340

5

1000

211

210575

52644

157931

194747

-36816

0.7299

-26871

6

1000

219

218998

54749

164248

194747

-30499

0.6853

-20902

7

1000

228

227757

56939

170818

194747

-23929

0.6435

-15398

8

1000

237

236868

59217

177651

194747

-17096

0.6042

-10330

9

1000

246

246342

61586

184757

194747

-9990

0.5674

-5668

10

1000

256

256196

64049

192147

194742

-2595

0.5327

-1382

11

1000

266

266444

66611

2854757

0

2854757

0.5327

1520803

 

 

 

 

 

 

 

 

Discounted cash inflow

1262554

 

 

 

 

 

 

 

 

Out flow

600000

 

 

 

 

 

 

 

 

NPV

662554

 

 

 

 

 

 

 

 

IRR

13%

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 13% which exceeds the discounting rate and hence the company can go for the project.

PART -3 (C)

The PART 3 (C) of the analysis includes scenario analysis and the following are the key factor apart from PART 2 for analysis purpose: 

Particulars

Briefs

VALUE OF PROPERTY ( Asking Price)

2000000

Loan to Value Ratio

70%

Loan

1400000.00

Equity

600000.00

Interest

6.5% p.a

Yearly repayment of loan

194747.00

CTR

0.30

Resale value

2854757

  

Projection of Cash flows on property

Sl no

Square Metre

Rent per Square Metre

Amount

Proposed Expenditure (25% of earning)

Net Amount

Interest

Tax

Repayment of principal

Net Post Repayment

Discounting Rate 6.5%

Amount after discount

1

1000

180

180000

45000

135000

91000

13200

103747

-72947

0.9390

-68495

2

1000

187

187200

46800

140400

84256

16843

110491

-71190

0.8817

-62765

3

1000

195

194688

48672

146016

77075

20682

117672

-69413

0.8278

-57464

4

1000

202

202476

50619

151857

69426

24729

125321

-67620

0.7773

-52562

5

1000

211

210575

52644

157931

61280

28995

133467

-65811

0.7299

-48034

6

1000

219

218998

54749

164248

52605

33493

142142

-63992

0.6853

-43856

7

1000

228

227757

56939

170818

43365

38236

151382

-62165

0.6435

-40003

8

1000

237

236868

59217

177651

33526

43238

161221

-60334

0.6042

-36456

9

1000

246

246342

61586

184757

23046

48513

171701

-58503

0.5674

-33192

10

1000

256

256196

64049

192147

11886

54078

182856

-56673

0.5327

-30191

11

 

 

 

 

2854757

 

256427

0

2598330

0.5327

1384198

 

 

 

 

 

 

 

 

 

 

Discounted cash inflow

911179

 

 

 

 

 

 

 

 

 

 

Out flow

600000

 

 

 

 

 

 

 

 

 

 

NPV

311179

 

 

 

 

 

 

 

 

 

 

IRR

10%

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 10% which exceeds the discounting rate and hence the company can go for the project. 

 
Conclusion

In every scenario project is viable and can be undertaken except if there is a pessimistic approach  hence the project can be undertaken based on the above findings.As from above analysis and finding we can conclude about the viability of the project acceptance and should be accepted.  

 
Bibliography

5 tips for financing your first commercial property loan. (2016, Dec 22). Retrieved December 22, 2016, from www.commercialpropertyguide.com.au: https://www.commercialpropertyguide.com.au/blog/investing/5-tips-for-financing-your-first-commercial-property-loan-48

Commercial Properties For Lease in Sydney, NSW 2000. (n.d.). Retrieved August 27, 2018, from www.realcommercial.com.au: https://www.realcommercial.com.au/for-lease/in-sydney,+nsw+2000/list-1

Economics, T. (n.d.). Australia Inflation Rate. Retrieved August 27, 2018, from tradingeconomics.com: https://tradingeconomics.com/australia/inflation-cpi

Portal, T. S. (2018). Price per square meter of land in selected cities/areas in Australia in 2015 (in Australian dollars). Retrieved August 27, 2018, from www.statista.com: https://www.statista.com/statistics/736673/australia-land-price-per-square-meter-in-selected-areas/

Rental Income and Expenses. (2018, March 6). Retrieved August 27, 2018, from www.iras.gov.sg: https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/What-is-Taxable-What-is-Not/Rental-Income-and-Expenses/

Cite This Work

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My Assignment Help. (2019). Investment Analysis Report For Income-Producing Property In Sydney. Retrieved from https://myassignmenthelp.com/free-samples/200696-property-investment-analysis-for-discounting-cash-flows.

"Investment Analysis Report For Income-Producing Property In Sydney." My Assignment Help, 2019, https://myassignmenthelp.com/free-samples/200696-property-investment-analysis-for-discounting-cash-flows.

My Assignment Help (2019) Investment Analysis Report For Income-Producing Property In Sydney [Online]. Available from: https://myassignmenthelp.com/free-samples/200696-property-investment-analysis-for-discounting-cash-flows
[Accessed 02 March 2024].

My Assignment Help. 'Investment Analysis Report For Income-Producing Property In Sydney' (My Assignment Help, 2019) <https://myassignmenthelp.com/free-samples/200696-property-investment-analysis-for-discounting-cash-flows> accessed 02 March 2024.

My Assignment Help. Investment Analysis Report For Income-Producing Property In Sydney [Internet]. My Assignment Help. 2019 [cited 02 March 2024]. Available from: https://myassignmenthelp.com/free-samples/200696-property-investment-analysis-for-discounting-cash-flows.

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