2211AFE - Real Estate Finance - Finance Assignment Help

Assignment Task

Scenario: After graduating from University, with prior industry experience, you decide to start your own business as a professional property adviser.  On day 10 of starting your business, as you prepare for the day, you receive two email requests for advice. An important condition of the two requests is that the advice must be submitted by 2 pm of the same day (AEST). You realise that, in light of other commitments, you can spare only 5 hours to prepare responses to the two requests, including any research required. Accordingly, you decide to block 5 hours of the day to work on the two requests.  You also decide that each report will not exceed 1000 words, including commentary, discussions, tables, calculations, workings, etc.

Request #1 (a)
This request is from a Sharma family. Part (a) of the request requires you to investigate a particular “office” property in CBD Brisbane for a sound long-term investment. You have gathered the following information regarding the property and investment prospects:
[1] date of evaluation: 1 July 2020
[2] property’s selling price/value is $1.5m
[3] the property has three units with the following information:
Unit Area (m2) Next market review Passing rent (2020)
1 250 1/10/2022 $45,000
2 300 1/09/2022 $50,000
3 310 1/05/2023 $60,000
[4] Market forecasts for 2021-2022 are as follows:
2020 2021 2022
Consumer price inflation 5.00% 1.00% 0.50%
Market vacancy level 6.00% 6.00% 8.00%
Change in market rent -1.00% -0.50%
Growth in operating expenses Notes: Growth in operating expenses equals CPI + 2% for the corresponding year
[5] Additional information
Equity in 2020 will be $700,000, which will increase in subsequent years by the amount of loan repayment; rest will be loan from the bank
Loan interest rate will be fixed at 9% pa and will be on reducing loan amount/outstanding balance
The Sharma family expects your advice to cover the following:
Assess and discuss the risk profile of the above property for the 2020-2022 period
In doing so, you are expected to clearly show the steps to ascertain the following:
2020 net income from the property/investment and the equity cash flows
2021-2022 forecasts of the net income from the property and the equity cash flows
to assess the risks, you are expected to use at least 5 ratios for the 2020-2022 period
For effectiveness, you decide to present your analysis in appropriate table forms, determining that detailed workings only for the year 2020 will suffice. Accordingly, discussions must refer to the tables and should cover, among others, strengths and weaknesses of the risk assessment, based on standard indications and symptoms.
In your report, in addition to the commentary on risk assessment, you decide to include the following as well:
commentary on the rationality/reasonableness of the forecasts provided above compared to the current trends and expectations, bearing in mind the implications of COVID19 insights from a recent report (Assignment #1) you had prepared on historical and forecast analysis; here, you decide to mention briefly but clearly the areas and property type you had analysed

Request 1 (b)
Part (b) of the request requires you to conduct a portfolio performance analysis, including the latest acquisition (above). Your research and information provided shows the following:
Properties and property securities Value ($ millions) Annual returns
CBD, Melbourne $2.00 10.00%
CBS, Perth $3.00 7.00%
CBD, Brisbane $1.50 13.00%
Retail, NSW $10.00 15.00%
And the Industry benchmark is as follows:
Category Weight Annual returns
Melbourne offices 8.0.00%
Perth offices 9.0.00%
Brisbane offices 7.0.00%
Offices 20.0.00%
NSW Retail 12.0.00%
Retail 25.0.50%
Office/retail aggregate 90.0% Including the proposed new Brisbane CBD investment in Part (a), you are to prepare a report for the Sharma’s on the performance of the family’s investment portfolio
Again, for effectiveness and professionalism, the analysis will be presented and structured clearly. In discussing the analysis, you decide to explain the reasons for the performance of Sharma’s portfolio vis-à-vis the benchmark and again draw insights from a recent report (Assignment #1) you had prepared on historical and forecast analysis.
In concluding the report, you also decide to provide a commentary on how your analysis compares with the current and expected property market performance in Australia

Request 2 (a)
This request is from City Office Property Trust. A review of their loan facilities is fast approaching. City would like you to prepare a report encompassing the following:
Construct City’s income statement and balance sheets for 2018-2019
Comment on the profitability trends. Do the trends reflect current reality? Explain
Comment on the current ratio trends for 2018-2019, including implications for further debt financing options and prospects
Comment on the debt to property ratio trends for 2018-2019. Include in your commentary the relevance of the maximum ratio if it is 30%. Do the trends reflect current reality?
Comment on the structure of debt financing and implications for possible breach of covenants
You are provided the following 2018 income statement and balance sheet information for City:
City Office Property Trust in $millions
Income Statement Year to June 2018
Rental income 315
Interest income 8
Share of profits of associates 35
Gain (loss) in fair value of properties 200
Rates and taxes (11)
Operating expenses (16)
Borrowing expenses (41)
Manager's fees (62)
Net loss in fair value of derivatives (30)
City Office Property Trust in $millions
Balance Sheet Year to June 2018
Cash 30
Prepayments and receivables 50
Investment properties 3100
Investment in associates 505
Payables 35
Interest-bearing liabilities (Note A) 115
Final distribution 65
Loans, bonds and notes (Note A) 700
Derivative financial liabilities 50
Issued capital 420
Reserves 2300
You are also provided with the following forecasts for 2019:
Rental income fell by 10%
Interest income has been declining by $3m pa
Share of profits of associates has been declining by $9m pa
Rates and taxes have increased steadily by 5% pa
Operating expenses have increased steadily by 5% pa
Borrowing expenses have been around 5% of total debt
Manager's fees is 2% of Investment properties
Cash fell by 3%
Pay and Rec fell by 5%
Investment properties increased by 5%
Investment in associates fell by 8%
Payables increased by 10%
Interest-bearing liabilities fell by 20%
Final distribution has been falling by 5% pa
Loans, bonds and notes increased by 12%
Derivative financial liabilities were 50 in 2018, 30 in 2019
Issued capital is a plug figure, i.e. total assets - (total liabilities plus reserves)
Reserves have been falling by 6% pa
And the following notes:
Note A - Borrowings in $ millions
Current Expiry
Discounted bills 31-Jan-19
Discounted bills 30-Sep-20
Bank A secured loan 31-Mar-21
Non-current Bank A secured loan 31-Mar-21
Bank B unsecured loan 30-Aug-22
Commercial mortgage backed securities 30-Jun-19
Private placement of 3 year notes 30-Sep-22
Private placement of 5 year notes 30-Jun-24
Unsecured bonds 31-Jan-25

Request 2 (b)
City’s manager is contemplating expanding the Trust’s investment portfolio and provides the following information:
total acquisition cost of the expansion will be $2,000m
City's in-house maximum debt to asset target ratio is 48%
the going market LVR is 70%
You’ve also gathered that:
after some adjustments to City's Balance sheet, total assets will be $4,500m
interest-bearing liabilities equal 40% of total assets
In this part of the report, you are requested to
provide a commentary on the structure of the new likely financing arrangements. As you usually do, you will show all workings clearly.
Your further investigation reveals that:
loan interest can be fixed at 7.5% pa for the next 3 years
initial distribution to equity of 8% is required
management fee is 1%
80% of the new investment will be leased for $100m pa
estimated rent on vacant areas will be $25m pa
a vacancy rate of 12% is expected
based on the above, you are expected to comment on the feasibility and prospects of the proposed expansion, with all workings shown clearly.

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