200696 Property Investment Analysis For Discounting Cash Flows

There are various income producing properties that generates income to the owner and serve the need of the tenant. Frankly, speaking there are generally two sources:-

• Letting out the property for rent to individuals, companies or other for the purpose of continuous revenue generation in the form of rent;
• The second source being capital appreciation of the property over the period of holding. 

Generally, the fixed income generating assets provide a stable return to the owner and is less risky compared to other sources of investment except government securities. However, they also come with their cup of risk in the form of non occupancy, global prices fall in real estate value etc. Principally, the following are primarily the revenue generating assets under fixed real estate investment:

• Commercial properties for let out of office spaces. The same has been considered for analysis by considering the data available for Sydney;
• Retail in the form of road side shops or mall shopd;
• Industrial space let out;
• Warehousing let outs;
• Other ancillary properties let out. 

1. Purpose of Assignment

The general intent of the paper is to carry out investment analysis for income generating property. The tools used in the analysis has been named here-in-below:

• Discounting Cash Flows;
• Net Present Value Method;
• Internal Rate of Return;
• Case Scenario;
• Profit After Tax Analysis.

1. Assumptions undertaken

The following are the assumptions undertaken for the analysis:

• The let out property is situated in Sydney, Australia;
• The property is Official;
• The Value of property is 20,00,000/- AUD;
• Loan to Value Ratio is 70%;
• Discounting Factor or rate is taken as opportunity cost of debt i.e. 6.5%;
• Period of analysis is 10 years;
• Inflation is 2.2%;
• Growth in the value of rent is 4%;
• Terminal growth rate is 7%;
• Ask value for the property is 28,54,757/- AUD;
• Best case and worst Case scenario sale values;
• Loan is taken at 6.5%
• Repayment of loan is 10 years 

1. Key Terms 

• Net Present Value: It is an investment analysis tool under which the cash inflows and outflows are discounted using a factor generally an opportunity cost of capital. Post discounting, the inflow is deducted from outflow to analyse the feasibility of the project. A positive NPV exhibits green signal while a negative exhibits red. 

• Internal Rate of Return: It is also an investment analysis tool under which the outflow is matched to inflow using a rate of return that exactly tallies outflow to inflow. If the rate of IRR is greater than the rate specified in the discounting factor the project is feasible otherwise not. 

• Discounting Factor:It is a rate at which the cash flows are discounted in the simulation. It generally represents the opportunity cost of capital or the expected rate of return. 

• Scenario Analysis:The scenario analysis is a significant tool in analysing the impact of positive and negative outcome on the viability of project. It is a significant tool is decision making and helps to analyse before the losses that company can incur on account of negative market scenario. 

• Profit After Tax:The  same is computed post taking into account the expensed incurred for earning the profits except repayment of principal.

The analysis has been based on the following:

• Income producing property in Sydney;
• Rise in rent price by 4% p.a.
• Inflation rate is 2.2%;(Economics)
• Property size is 1000 Sq metres;
• Property purchase rate is 2000 per Sq metres;(Commercial Properties For Lease in Sydney, NSW 2000)
• Expenditure is 25% of rent;
• Rate of discounting is 6.5%;
• Terminal yield is 7%.(Portal, 2018) 

Tenancy Schedule

(Amount in AUD)

Out Going Schedule

   (Rental Income and Expenses, 2018)

Discount Rate Computation

   (5 tips for financing your first commercial property loan, 2016)

Terminal Yield

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 10% which exceeds the discounting rate and hence the company can go for the project.

PART -3 (A) 

 The PART 3 A of the analysis includes debt financing and the following are the key factor apart from PART 2 for analysis purpose:

Tenancy Schedule

Outgoing Schedule

 Discounting Rate Computation

Loan Schedule 

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 13% which exceeds the discounting rate and hence the company can go for the project.

PART -3 (B) 

The PART 3 B of the analysis includes scenario analysis and the following are the key factor apart from PART 2 & PART 3(A) for analysis purpose: 

On the basis of above, it may be seen that purchasing of property is not viable under pessimistic view as the net outflow after discounting exceeds the inflow and hence the project is not viable. Further, the IRR of the project is 3% which does not exceeds the discounting rate and hence the company cannot go for the project. 

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 18% which exceeds the discounting rate and hence the company can go for the project.

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 13% which exceeds the discounting rate and hence the company can go for the project.

PART -3 (C)

The PART 3 (C) of the analysis includes scenario analysis and the following are the key factor apart from PART 2 for analysis purpose: 

On the basis of above, it may be seen that purchasing of property is viable as the net inflow after discounting exceeds the outflow at initial stage and hence the project is viable. Further, the IRR of the project is 10% which exceeds the discounting rate and hence the company can go for the project. 

In every scenario project is viable and can be undertaken except if there is a pessimistic approach  hence the project can be undertaken based on the above findings.As from above analysis and finding we can conclude about the viability of the project acceptance and should be accepted.  

5 tips for financing your first commercial property loan. (2016, Dec 22). Retrieved December 22, 2016, from www.commercialpropertyguide.com.au: https://www.commercialpropertyguide.com.au/blog/investing/5-tips-for-financing-your-first-commercial-property-loan-48

Commercial Properties For Lease in Sydney, NSW 2000. (n.d.). Retrieved August 27, 2018, from www.realcommercial.com.au: https://www.realcommercial.com.au/for-lease/in-sydney,+nsw+2000/list-1

Economics, T. (n.d.). Australia Inflation Rate. Retrieved August 27, 2018, from tradingeconomics.com: https://tradingeconomics.com/australia/inflation-cpi

Portal, T. S. (2018). Price per square meter of land in selected cities/areas in Australia in 2015 (in Australian dollars). Retrieved August 27, 2018, from www.statista.com: https://www.statista.com/statistics/736673/australia-land-price-per-square-meter-in-selected-areas/

Rental Income and Expenses. (2018, March 6). Retrieved August 27, 2018, from www.iras.gov.sg: https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/What-is-Taxable-What-is-Not/Rental-Income-and-Expenses/