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Asset Procurement Strategy

Asset Procurement Strategy. Lesson 1. Basic Concepts of Real Estate Marketability Analysis. Summary of Concepts. Property Productivity Concepts Physical and market appeal attributes of the site and the structures Legal and Regulatory constraints Location attributes Market Area Concepts

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Asset Procurement Strategy

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  1. Asset Procurement Strategy Lesson 1

  2. Basic Concepts of Real Estate Marketability Analysis

  3. Summary of Concepts • Property Productivity Concepts • Physical and market appeal attributes of the site and the structures • Legal and Regulatory constraints • Location attributes • Market Area Concepts • Time-distance relationships • Market or Trade Area (population projection area) • Demand Concepts • Major economic variables • Supply Concepts • Changes in the stock • Influences on the supply of new construction • Supply and Demand Interaction Concepts • Indicators of disequilibrium

  4. Property Productivity Concepts • Productivity Analysis - • Analysis of a property’s capacity to deliver services to meet human needs, house economic activities, and supply satisfaction and amenities. • A parcel of real estate produces (supplies) services for those who use it. • Price paid is a function of: • its supply of services relative to potential users’ purchasing power • need for its services • inability to find good substitutes at a lower price

  5. Property Productivity Concepts • Market Analysis in Real Estate is different from other types of market analysis: • real estate is not well defined • product can change over time • location is fixed • Focus of the discussion for all aspects of the subject property is to: • Segment the subject market to address advantages and disadvantages • Property Productivity Analysis seeks to answer: • What does the subject have to offer to the market? • What are the subject’s competitive advantages and disadvantages?

  6. Property Productivity:Site and Structures • Design and condition of the subject can limit the potential market it can serve. • Physical attributes analysis is the initial action in marketability analysis • Physical attributes of the site: • Size, Shape, Topography • Vegetation, Natural Drainage, Floodplain • Soil and Subsoil

  7. Site Plan

  8. Site Plan

  9. Property Productivity:Site and Structures • Physical Attributes of a Structure • Exterior physical features: • Substructure and Superstructure • Interior physical features: • Walls, Supports and Finish • Equipment and Mechanical Systems • Plumbing, Heating, Ventilating, and air-conditioning • Electrical • Miscellaneous including fire protection, sprinklers, escalators and elevators, signal, alarm or call systems • Market Appeal Attributes • Unique and Special features of a property • Think: Appeal to Who or what group of users?

  10. Property Productivity:Legal and Regulatory Attributes • Regulations may be Public or Private • Can enhance or detract from the value of the property • Examples of Constraints: • restrict a site zoning that is ideal for an office building to residential housing • strong neighborhood association prevents changes in use • requirements for extra wide streets and landscaping increase cost of development, thereby reducing the supply • Examples of Enhancements: • Rezoning of a neighborhood that is undergoing transition to a higher and more intensive use. (i.e.: residential to commercial)

  11. Property Productivity:Legal and Regulatory Attributes “URA bans new eateries at Upper Thomson, Little India and Bedok dining spots due to parking woes” Jun 7, 2016 The Straits Times https://www.straitstimes.com/singapore/ura-bans-new-eateries-in-upper-thomson-little-india-and-bedok-due-to-parking-woes

  12. Property Productivity:Location Determinants • Linkages: • Transportation linkages • Movement of people, goods and services to and from the subject • Utility linkages • Gas pipelines, sewer, water, telephone, electricity • Components • Route: The established or directed course of travel between two spatially separate parcels of real estate • Access: The ability to enter or pass to a site from a route, or to a route from a site e.g. streets, curb cuts, sewer laterals • Travel Mode: The movement method for gaining access e.g. automobile, bus, train, truck, airplane, boats, etc. • Route Orientation: A route may be oriented inward toward the subject, outward from the subject or dual directional e.g. a grocery store located on a busy street so that people returning from work can easily stop.

  13. Property Productivity:Location Determinants • Exposure Externalities • May have positive or negative effects on the productivity of the site and its linkages • Neighborhood Externalities • neighborhood character - properties compatibility with each other • Linkage Externalities • impairment to the productivity of the land such as when a sewer has reached it’s capacity, but the neighborhood is only one-half developed or streets are too narrow and overcrowded. • Classification of Externalities • can be Positive or Negative, Natural or Man-made

  14. Property Productivity:Location Determinants • Associations: Different types of property require different linkages and land use associations • Housing must be linked to jobs, shopping and community facilities • Retail uses need customers • Office uses are supported by hotels, print shops and restaurants

  15. Market Area Concepts • Demand and Time-Distance Relationships • Most common way to define a market area • Example: Primary market area for a neighborhood convenience store is within 10 mins traveling time • Example: Primary market area for a retail mall is 1 to 2 km or within 30 mins traveling time. • Population Projection Area • Must identify the area to be included in the projection • Projection area is different for different property types • How much of the market can I capture? or • What will be my market share?

  16. Demand ConceptsLocal Economic Analysis • The Economic Overview • Provides the base data for analysis of the subject’s market segment • Support for location analysis and the economic relationship to physical growth patterns • Helps to identify the demand segment • Provides data to check the secondary data and forecasts made by other professionals

  17. Demand Side Economic Variables • Employment • Total Employment for the Subject Market Area • Major Employers and Industries • Economic Base Analysis • Unemployment • Sources of Employment Data • Regional Planning Agencies • Metropolitan or City Planning Agencies • University forecasting centers • Department of Labor for the State • Local Development Agencies

  18. Demand Side Economic Variables • Population and Households • Population and Number of households and families, population in group quarters • Household: includes all the persons who occupy a housing unit • Family: includes a householder and one or more persons related to the householder by birth, marriage or adoption. • Composition variables • Age distribution • Education and Occupation • Income Distribution • Household Size

  19. Demand Side Economic Variables • Income • Mean, Median and per Capita Income • Income Distribution • Data to Gather and Analyze • Number of existing housing units • New Construction • Types of existing and newly constructed housing units • Occupancy and vacancy data • Price level • Compositional data concerning the housing stock • size, age, style, etc. • Mortgage interest rates and credit availability

  20. Demand Analysis • Office Market • Employment • Occupied office space percentage • Typical size of occupancy • Housing Market • Population forecast • Income • Household Size • Age • Rental versus owner-occupied • Retail Market • Population forecast • Disposable income - available for retail sales • Household size • Spending patterns

  21. Supply Analysis • Must be performed in relationship to the market that is being analyzed. • For Example: the market for new residential construction • The Supply of New Residential Construction • Number of new residential construction • affected by: price of land, construction labor, financing, materials and risk • The number of builders in the market • Builders expectations about profits • Seasonality

  22. Supply Analysis • The Supply of Resale Units • Economic factors such as employment and layoffs • Employee relocation • Reduction in household purchasing power • Family life cycle - changes in household needs due to maturing population • Mortgage interest rates • Price of substitute housing

  23. Supply and Demand Interaction • Indicators of Oversupply or Excess Demand • Vacancy (or occupancy) rates • Absorption Rates • Demand compared to supply that suggests an excess of supply (or demand) • Rising (or declining) prices and/or rents • Lack of Sale transactions • Important Questions to Ask and Answer • Do the current trends in absorption, vacancies etc. make sense and support the demand and supply conditions? • What is the current stage of the real estate cycle? • How long might these observed conditions persist?

  24. Economic Feasibility Techniques

  25. Buying a Commercial Unit / Building • Investment Objectives • Holding Period • Equity and Debt Financing • Economic Evaluation

  26. Economic Evaluation Approaches • Economic Analysis Techniques • Simple payback analysis • Detailed economic analyses • Net Present Value • Measurement to evaluate “go” or “no go”

  27. Simple Payback Period Capital Cost or Investment ($) Divided by Annual Benefit / Returns ($) = number of years (or months, days etc)

  28. Simple Payback Period • Payment period in capital budgeting refers to the period of time required for the return on an investment to break-even with the investment. • Question • Equipment 1 costs $10,000 and will save $2,000 per year in operating costs • Equipment 2 costs $12,000 and will save $3,000 per year in operating costs Which item has the better simple payback? • Solution • Equipment 1: 10,000 / 2,000 = 5 years • Equipment 2: 12,000 / 3,000 = 4 years The shorter the payback period, the better

  29. What is Time Value of Money? • Time value of money (TVM)is the idea that money that is available at the present time is worth more than the same amount in the future, due to its potential earning capacity.   • This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. • One of the most fundamental concepts in finance is that money has a time value attached to it. • In simpler terms, it would be safe to say that a dollar was worth more yesterday than today and a dollar today is worth more than a dollar tomorrow.

  30. Time Value of Money

  31. Time Value of Money There are five (5) variables that you need to know: • Present value (PV) - This is your current starting amount.  It is the money you have in your hand at the present time, your initial investment for your future. • Future value (FV) - This is your ending amount at a point in time in the future. It should be worth more than the present value, provided it is earning interest and growing over time. • The number of periods (N) - This is the timeline for your investment (or debts). It is usually measured in years, but it could be any scale of time such as quarterly, monthly, or even daily. • Interest rate (I) - This is the growth rate of your money over the lifetime of the investment. It is stated in a percentage value, such as 8% or .08. • Payment amount (PMT) - These are a series of equal, evenly-spaced cash flows.

  32. Time Value of Money • You can calculate the fifth variable if you are given any four of the five (all) variables.  • A simple example of this would be: If you invest one dollar (PV) for one year (N) at 6% (I), you will receive $1.06 (FV). • This would be the same as saying the present value of $1.06 you expect to receive in one year, is only $1.00 (PV).

  33. Net Present Value (NPV) • Net Present Value is an indicator of how much value a project/ investment could add to the firm (absolute value) • It is computed by using the firm's cost of capital as the discount rate of cash inflows, minus the present value of cash outflows, including the initial investment. • NPV > 0; investment would add value to the firm; the project MAY BE accepted • NPV < 0; the project should be rejected • How about NPV=0?

  34. Net Present Value (NPV) • Suppose you saved $1,000 for one year at 5% per year interest • What is the future value in one year?

  35. Net Present Value (NPV) • Interest = $1,000 x 5% = $50 • Value in one year = principal + interest = $1,000 + $50 = $1,050 • Future Value (FV) = $1,000 x (1 + 5%) = $1,050

  36. Net Present Value (NPV) Future Value $1,050 Present Value $1,050 5% pa interest?? $1,050 divided by 1.05 $1,000!!

  37. Net Present Value (NPV) Present Value of Investment Cost MINUS say $1,000,000 Present Value of Annual Returns / Benefits PLUS say $10,000 per year over project life $10,000 / 1.05 $10,000 / 1.052 …. $10,000 / 1.05x

  38. NetPresent Value (NPV) Present Value of Investment Cost MINUS say $1,000,000 Present Value of Annual Returns/ Benefits PLUS say $10,000 per year over project life $10,000/ 1.05 $10,000/ 1.052 …. $10,000/ 1.05x <

  39. Net Present Value (NPV) • Your broker calls you and tells you that he has this great investment opportunity. If you invest $100 today, you will receive $40 in one year and $75 in two years. • If you require a 14% return on investments of this risk, should you take the investment?

  40. Net Present Value (NPV) • PV1= $40 x PVIF 14%, 1 = $40 x 0.8772 =$35.09 • PV2= $75 x PVIF 14%, 2 = $75 x 0.7695= $57.71 • Total PV = $35.09 + $57.71 = $92.80 Should not invest (Reject) because the total PV is lower than the initial investment NPV = $92.80 - $100 = -$7.20 i.e. NPV < 0 (Reject)

  41. Tutorial

  42. Question 1 1a) You are offered an investment that will pay you $200 in Year 1, $400 in Year 2, $600 in Year 3 and $800 in Year 4. You can earn 12 percent on very similar investments. What is the most you should pay for this investment?

  43. Answer 1

  44. Answer 1

  45. Answer 1 Find the PV of each cash flow and add them • Year 1 PV = $200 x PVIF 12%, 1 = 200 x 0.8929 = $178.58 • Year 2 PV = $400 x PVIF 12%, 2 = 400 x 0.7972 = $318.88 • Year 3 PV = $600 x PVIF 12 %, 3 = 600 x 0.7118 = $427.08 • Year 4 PV = $800 x PVIF 12%, 4 = 800 x 0.6355 = $508.40 Total PV = $178.58 + $318.88 + $427.08 + $508.40 = $1,432.94 Ans: Investment Amount to be lower than $1,432.94

  46. Question 2 ABC Co Ltd is considering two new machines that should generate considerable cost savings in its electricity consumptions. The cost of each machine is $14,000 and neither is expected to have a salvage value at the end of a 4-year useful life. ABC Co Ltd 's required rate of return is 12% and the company prefers that a project return its initial outlay within the first half of the project's life. The annual after-tax cash savings for each machine are provided in the following table: Year Machine A Machine B 1 $5,000 $8,000 2 $5,000 $6,000 3 $5,000 $4,000 4 $5,000 $2,000 Total $20,000 $20,000 Required: a) Compute the payback period for each machine b) Compute the net present value for each machine c) Which machine should be purchased?

  47. Answer 2 a) Machine A: $14,000 / $5,000 = 2.8 years Machine B: $14,000 - $8,000 - $6,000 = $0 (i.e. Payback Period = 2 Years) b) Net present value: c) Machine B is preferred. It has a higher net present value and a shorter payback period.

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