ASSIGNMENT 2 INVESTMENT VALUATION

Introduction

You have been appointed as an advisor to a tax-exempt investment fund that has to make a choice between three alternative property investments which they have been offered.

Investment A is a freehold warehouse in Agios Athanasios industrial area in Limassol, Investment B is a freehold residential building comprised from apartments in Larnaca, and Investment C is a freehold office in Paphos

Each property is for sale at €1,500,000 and the required target rate of return in every case is 10%. You are allowed to use data from estate agents and make other logical assumptions.

The purpose of this exercise is to have students understand appraisal techniques and be able to compare different investment properties.

Assignment DATA

INVESTMENT A

The property is a freehold warehouse unit in Agios Athanasios, Limassol, 4500sq.m and 450sq.m of office space. It is rented on a 20 years lease and 6 years are remaining until the end of the lease. Last year’s rent was €14,500 per month. Approximately 5% of the rent is lost on outgoings (including management fees). Acquisition and sale fees are estimated at 3% of price. Rents are annually reviewed and according to the agreement are following the CPI index plus 1%. Investment is expected to be sold at the end of the lease.

INVESTMENT B

This property is a block of 12 flats in Larnaca. The building is of medium quality and 15 years old. Each flat can be rented for approximately €1,200 per month. Management fees are calculated to be 14% of the income. Historical evidence showed that the rent in the vicinity is increasing 5% per annum. Having in mind that major renovation works will take place after 4 years with a cost of €120,000 and that the property must be sold no later than 8 years, calculate the investment worth of it. Acquisition and sale fees are estimated at 5% of the price.

INVESTMENT C

This property is a freehold; grade A, 1500 sq.m. office in Paphos’s CBD (commercial and business district). A Russian company that was occupying the property was paying €12/month per sq.m. but they have just moved out. Another company from Germany is interested to rent the office and they are offering a 5 year contract (FRI lease) but they will move not earlier from 6 months and no later than one year. They are willing to pay the amount of €30,000 as a reserve deposit and €14/sq.m. per month (with a 2% yearly increase) as soon as they move in. Acquisition and sale fees are estimated at 5% of the price.

Assignment TASKS

 In every case you should identify the ‘sensitive’ values and apply a proper sensitivity analysis as presented in the workshop class.

 You should provide the client an analytical spreadsheet of every investment and an overall spreadsheet that will include the sensitivity analysis. You should also write a detailed technical letter explaining your analysis and clarifying your choice.

 The client is offering you a 10% bonus if you show him skills of risk – adjustment techniques (analysis that incorporates risk considerations)