Sample/practice exam 2017, questions and answers PDF

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BRE315 Property Valuation Revision 2 Question 1 (10%) Goodhope Property Limited has identified an investment project with the following cash flows. a. What is the future value of these cashflows at the end of year 4 if the discount rate is 8% and 11% respectively. b. What is the present value of the...

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BRE315 Property Valuation Revision 2

Question 1 (10%) Goodhope Property Limited has identified an investment project with the following cash flows. a. What is the future value of these cashflows at the end of year 4 if the discount rate is 8% and 11% respectively. b. What is the present value of these cashflows at the beginning of the investment if the discount rate is 8% and 11% respectively. Year 0 1 2 3 4

Cashflow -1000 500 600 700 800

Answer a. At discount rate 8% FV in t4 = 2885.70 – (1000x(1.084)) = 2885.70 – 1360=$1525 At discount rate 11% FV in t4 = 3000.08 – (1000x (1.114)) = 3000.08 – 1518 = $1482 b. At discount rate 8% PV in t0 = -1000+462.96+514.4+555.681+588 = $1525 x 0.73503 = $1121.065 At discount rate 11% PV in t0 = -1000+450+487+512+527 = $1482 x 0.65873 = $976

Question 2 (10%) You’ve just joined Collier Consultancy Limited. They’ve offered you two different remuneration packages for your choice. You can have $80,000 per year for the next two years. Or you can have $65,000 per year for the next two years along with a $30,000 signing bonus today. If the interest rate is 8 percent compounded monthly, which option do you prefer?

Answer EMR = 0.6667% EAR = (1+0.006667)12 – 1 = 8.30% PV1 = 80000/1.083 + 80000/1.0832 = 73869+68207 = $142,076 PV2 = 30000 + 65000/1.083 + 65000/1.172889 = 30000 + 60018 +55419 = $145,437 Take Option 2 (Exercise 1B question 4)

Question 3 (10%) Peter wants to buy a property by taking out a mortgage. What would be the annual and monthly repayments on the mortgage by taking out a loan of $900,000 borrowed over 20 years at 5% compound interest. Answer By use of annuity formula a. Annual payment: 5% 5% 5% = = 0.08024 𝑥 900000 = $72,218 = 1 1 − 0.37689 0.62311 1− (1.05)20 b. Monthly payment: 0.004167 0.004167 0.004167 0.004167 = = = 1 1 1 − 0.36861516 0.63138483 1− 1−( 2.7128564) (1.004167)240 = 0.006599778458409 𝑥 900000 = $5,940

Question 4

(20%)

A leasehold property is let on lease at a net rack rent of $2,500 p.a., for a term of 70 years to a father and his son. The ground rent payable to the freeholder is $500 p.a. The father will get the rents for the coming 30 years, whereas his son will get the rents for the remainder of the term. Assuming the yield is expected at 7% and that an annual sinking fund can be invested at 3%. Calculate the values of: a. Father’s interest b. Son’s interest

Suggested Answer: Father’s interest Net rack rental value Deduct ground rent paid Profit rent YP for 30 yrs @ 7% and 3%

$2,500 500 2,000 10.9867 $21,973 $22,000

Capital value of Father, say,

1 𝑆 𝑖 + (1 + 𝑆)𝑛 − 1 1 3% 7% + (1 + 3%)30 − 1

= 10.98

Son’s interest Net rack rental value Deduct rent paid Profit rent YP 70 yrs @ 7% and 3% Less YP 30 yrs @ 7% and 3% Capital value say $4,900

$2,500 500 $2,000 13.4523 10.9867

2.4656 4,931

Question 5 (20%) A shop in a prime location is let on FRI terms with 7 years of the lease unexpired. The reserved rent locked up in the lease is $2,400 p.a. The current full renal value in the market is $3,750 p.a. on FRI terms. There is no provision for rent review and the freehold rate of return is found to be 6.5%. Since the reserved rent is lower than the market rent, it is therefore assumed that the lower rent during the term is more secure and the rate of 5.5% should be able to reflect this security. What is the value of the freeholder’s interest? Answer Term Rent reserved YP for 7 years @ 5.5% Value for 7 years

$2,400 5.68 $13,639

PV=1/1.4546791611=0.68743680 1 − 𝑃𝑉 𝑖

1−0.68743680 =5.68 0.055 Reversion

Reversion to current FR value YP in perp @ 6.5% (1/0.065) Less: PV of $ in 7 yrs @ 6.5% YP in perp defd. 7 yrs @ 6.5%

Capital value of freeholder’s interest, say,

$3,750 15.38 0.64 9.9 $37,125 $50,764 $51,000

Question 6 (30%) Value both the freehold and leasehold interests in shop premises which have just been let on a 21 year lease at a rent of $4,000 p.a. for the first 7 years, $6,000 for the next 7 years and $8,000 for the remainder of the term. The current full rental value of the shop is $8,000 p.a. The freehold yield in the market is found to be 7%, whereas a half-percentage should be deducted from the yield to reflect the lower risk of the more-secured rental to be received at $4,000 and $6,000 respectively. In regard to the leasehold interest, since the risk of leasehold interest is generally higher than that of freehold interest, the difference is reflected by a one-percentage higher on the yield of leasehold interest compared to the freehold yield. Furthermore, the leasehold interest may also help generate a 3% return by use of a sinking fund. Answer FREEHOLDER’S INTEREST First 7 years: Net rent received YP for 7 yrs @ 6.5%

$4,000 5.484523 $21,938

PV=1/1.5539865=0.643506 1 − 𝑃𝑉 𝑖

1−0.643506 0.065

=5.484523

Second 7 years: Net rent received YP for 7 yrs @ 6.5%

5.484523

PV of $1 in 7 yrs @ 6.5%

0.644

Third 7 years: Full rental value YP in perp @ 7% (1/0.07) PV of $ in 14 yrs @ 7% (1/2.578534)

14.2857 0.388

Capital value to freeholder is, say,

$6,000 3.532

$21,192

$8,000 5.54

$44,343 $87,473 $87,500

LEASEHOLD’S INTEREST: First 7 years Full rental value Rental payable Profit rent YP 7 yrs @ 8% & 3%

$8,000 $4,000 $4,000 4.7505 $19,002

1 8% +

3% (1 + 3%)7 − 1

= 4.7505

$8,000 $6,000 $2,000

Second 7 years Full rental value Profit rent YP 14 yrs @ 8% & 3% Less YP 7 yrs @ 8% & 3%

7.2188 4.7505

Third 7 years: No profit rent

Capital value of the leasehold interest

2.4683

$4,937

$0 $23,939 $24,000

Question 7 1.

A plot of land is ready for redevelopment, and your survey obtained the following information: i. ii.

iii. iv.

Site Area: 800m2 Optimal type of redevelopment: a 30-storey (including the ground floor) commercial building with the ground and first floors for shopping arcade and the upper floors for office purposes Yield of similar development in the market is 10% Schedule of gross floor areas, saleable ratios and saleable prices are as follows: Floor

Ground floor First floor Upper floors -

Use

GFA

Saleable ratio

Shop Shop Office

800 m2 800 m2 470 m2 / F

85% 75% 80%

Saleable price $/m2 160,000 108,000 82,000

Building cost @ $25,000/m2 Professional fees @ 6% of the building cost Developer’s profit @ 20% on GDV Agent’s fee @ 1% of the total sale proceeds Short-term finance for the development can be obtained at 9% p.a. (assuming that half of the development period carries the interest payment burden) The development would take 3 years to complete.

Prepare the valuation and advise your client the highest price he should offer for the site....