Exam 2013 questions - Trimester 1 PDF

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Trimester 1...

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Deakin University

Trimester 1, 2013

School of Management and Marketing Faculty of Business and Law Subject Number:

MMP212

Subject Title:

Property Investment

Exam Duration:

Two (2) hours

Reading Time:

15 minutes

This paper has

5 pages

Authorised materials: Financial Calculators

Instructions to Invigilators: The exam is not to removed from the exam room

Instructions to students: Answer all questions Write your student number and the question numbers on each answer booklet used. Answer Seven (7) questions (out of Seven (7) questions) All marks are indicated after each question. Individual marks are indicated after each question This is a closed book exam. In the absence of specific information candidates are expected to make reasonable assumptions and state such assumptions clearly. Wherever possible, use appropriate examples to illustrate your answers.

Paper to be held by Deakin Library

MMP212 Property Investment

Page 1 of 5

QUESTION 1 In relation to buyers and sellers of investment grade property discuss, in detail, the purpose of undertaking a market analysis. In your answer explain how buyers and sellers would use and/or rely upon a market analysis and give context to the following matters, as they would pertain to the market analysis: • Supply • Demand • Theory of equilibrium • Elasticity Your answer should provide clear evidence of your understanding of how the above factors would be used by the respective parties. Total 20 marks QUESTION 2 DCF and capitalisation methods are common in the valuation industry. Within the context of these methods of valuation explain, in detail, the following: • How future potential capital expenditure is accounted for within each method • In the case of DCF’s, the relevance of NPV and IRR • How future rent increases are accounted for within each method • How potential vacancy periods are accounted for within each method Total 16 marks QUESTION 3 Explain the meaning of each of the following: Net lease Market yield Passing yield Reversionary yield Reversion rent

2 marks 2 marks 2 marks 2 marks 2 marks Total 10 marks

MMP212 Property Investment

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QUESTION 4 1. Calculate the monthly repayments for a mortgage of $520,000 payable over 20 years at 7.25%pa. 1 mark 2. Calculate the amount that would need to be set aside each year into a sinking fund in order to have sufficient funds to pay for a building upgrade in 6 years. The amount you will need in 6 years is $325,000 and the current available rate of investment interest is 6.25% payable quarterly. 2 marks 3. Calculate the present value of a 7 year lease that has run 1 year where the monthly payments are $12,650 and the appropriate discount rate is 8.3%pa. 2 marks 4. What is the value of the right to receive $25,000 pa paid half yearly for 15 years deferred 5 years at 8.3%pa? Payments are made at the beginning of period. 3 marks 5. How much would you need to invest today to provide $450,000 in 15 years time. Interest will be available at 7% for the first 5 years, 6% for the next 5 years and then 5% for the remaining 5. All interest payments are annual. 4 marks Total 12 marks QUESTION 5 You have been asked by a potential investor to provide an opinion of market value for a multi tenanted set of office suites they are considering purchasing. The complex has individual 12 tenants in all and 3 of the leases are gross whilst the remaining 9 are net leases. The total NLA of the building is 2,600 m2 and the combined NLA of the tenancies with the gross leases is 650m2. Other relevant particulars are below. State all assumptions in your answer. Income Gross potential income Expected average loss of income due to vacancy

$941,200pa 2.5%

Expenses (whole building Agency letting/management fees Utilities Maintenance Other (payable by tenants)

$7.3 per m2 $6.50 per m2 $11.50 per m2 $20.50 per m2

Market data; Current capitalisation rate of similar properties

8.25%

MMP212 Property Investment

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Using the capitalisation approach, calculate the expected value of the property. Assume all leases are net. Total 12 marks QUESTION 6 Using the same data as in question 5, recalculate the expected value of the property on the basis that the rental income will increase under the terms of the leases by 4% in average in 14 months from the date of valuation. The outgoings are also expected to increase by CPI, which is currently 3.1%. Hint: rent is paid at the beginning of each month. Also, what is the years purchase (YP) of this investment and what does YP tell us about the investment? Total 15 marks

QUESTION 7 Explain, in detail, why it is necessary to undertake due diligence when assessing the value of a building. What elements are considered when performing a due diligence and how are these elements and respective costs factored into the final value when contemplating a major investment decision? Total 15 marks End of exam

MMP212 Property Investment

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Formulae Future Value of 1 (Compound Interest)

• FV of 1 = A = (1 + i) n Present Value of 1

• PV of 1 = V = 1 / A = 1/ (1 + i) n Future Value of 1 per annum

• FV of 1pa = (A-1)/i = [(1 + i) n - 1]/i Annual Sinking Fund

• PMT asf = i/(A-1) = i/[(1 + i) n - 1] Present Value of 1 per annum

• PV of 1 pa = (1 - V)/i = [1 - {1/(1 + i) n}]/i Annuity

• PMT annunity = i/(1 - V) = i/[1 - {1/(1 + i) n}]

MMP212 Property Investment

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