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AP/JUN2012/EMT511

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

INVESTMENT APPRAISAL EMT511 JUNE 2012 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. This question paper consists of two (2) parts PART A (3 Questions) PART B (3 Questions)

2.

Answer four (4) questions only. Answer two (2) questions from PART A and two (2) questions from PART B in a separate Answer Booklet. Question 1 from PART A is compulsory. Start each answer on a new page. Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) iii) iv) the Question Paper two Answer Booklets - provided by the Faculty Parry's Valuation & Conversion Tables - provided by the Faculty a graph paper - provided by the Faculty

3. 4.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 6 printed pages
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AP/JUN2012/EMT511

PART A

QUESTION 1 a) Property investment requires a risk premium if compared with government securities. Explain 4 (four) examples of risks associated with property investments. (10 marks) b) Explain with an example why a leasehold valuation uses a dual rate Year's Purchase. (10 marks) c) Explain equated yield and how can it be estimated to be used in the valuation of a particular property investment. (5 marks)

QUESTION 2 An investor purchased an office property for RM3.4 million, 3 years ago. It was then leased to a shipping company for a term of 10 years for RM374, 000 p.a on gross terms. The lease is due for renewal in 2 year's time. Research shows that similar but rack-rented properties are selling at around RM4 million in the market now while the average rental is about RM360,000 p.a net. Investors in such properties would require an 11% return on capital. a) Value the reversionary investment in the above property using the traditional term and reversion investment method. (7 marks) b) Discuss on the weaknesses of the traditional method. (8 marks) c) Explain how the short-cut DCF method can be a suitable alternative to the traditional method. (10 marks)

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QUESTION 3 a) Explain and differentiate between "investment valuation" and "investment analysis" in the context of property investment appraisals. (6 marks) b) An investor was offered to buy a freehold property for RM2.0 million. It is currently let to a tenant with an unexpired term of 4 years. The reserved rental is RM 126,000.00 p.a net but the rental value of the property is currently estimated at RM 168,000.00 p.a net. The market yield for this type of property is currently 7% but the above investor's target rate of return is 10.5%. i) Using the above scenario explain what does IRR measure and how it can be used to help an investor make his decision. (7 marks) ii) Calculate the NPV of the above investment and advise the investor whether he should accept the offer. (12 marks)

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PARTB

QUESTION 1 A developer was offered to buy a piece of land located just outside Ipoh measuring 25 acres for RM15.0M. Even though it is still under agricultural title, it is quite obvious that it has a good potential for development. Now he is considering whether he should purchase it and re-sell after conversion is approved or carry out a development project on the land. His decision will depend on the state of the property market in the next 2 to 3 years, specifically on the market demand and supply situation; also on the general economic scenario of the country which may affect costs and profit level. The first option is to convert the land to housing use which may take about a year to approve. According to experts' views converted land can be expected to sell at RM20psf if the market maintains to be strong but there is also a 20% chance that the market may turn slightly down and the expected price may only be RM17psf. Conversion is expected to cost about RM2.0M. The next option is to develop the land for residential development whereby the expected GDV will depend on the demand for housing in the next 2 years (the total development period). Expected GDV on project completion is RM80M, RM50M and RM30M if demand is good, moderate and low respectively. The probability of having good, moderate or low demand for housing is 50%, 40% and 10% respectively. The total development cost is expected to be RM50M but there is also a 30% chance that this may go up to RM70M. The developer also has in his option to carry out a mixed-use development on a joint-venture basis whereby costs fluctuation will not be a very great concern. The net profit expected from this JV is RM38, RM21M or (RM10) if market demand is good, moderate or low respectively. The chances of good, moderate or low demand are 40%, 30% and 30% respectively. Development is expected to take 30 months to complete. The developer requires a rate of return at 8% p.a. a) Draw a decision tree to help the developer make a decision. (10 marks) b) Tabulate the pay-off matrix for the problem. (8 marks) c) Using a holistic approach, advice the developer on the best option to take. (7 marks)

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QUESTION 2 Krypton Bhd has a piece of development land measuring 50 acres near a big township which has a good potential to be developed into single storey and double storey terrace houses. To take advantage of economies of scale, he must use at least 70% of the land for the development. An acre of land can be developed into 12 units of single storey terrace houses or 10 units of double storey terrace houses. The total costs of constructing a unit of single storey house would be RM80,000.00 while for a double storey house the cost would be RM120,000. The selling price of single storey houses is expected to be RM135,000.00 while for a double storey house it would be RM200,000.00 each. With quiet a large pool of workers at hand, 2.5 acres of land can be constructed with single storey houses in a single month on average; while for double storey houses, 2 acres can be constructed. However, all construction needs to be completed in 18 months since the developer has to move on to a much bigger project in which they already had an earlier commitment. For the same reason the developer is also going to limit his capital outlay to a maximum limit of RM36.0M.To maximize profit, how many acres must be developed with single storey and double storey houses respectively. You are required to use the linear programming method to help the developer make their decision. (25 marks)

QUESTION 3 The Property Division of a large corporation intends to convert some old detached houses into a recreational centre on the ground floor and residential apartments on the upper level the activities which will take place during the pre-construction stage, their durations and respective activity dependency are shown in the table below.

Activity

Activity Description

Duration to Complete (Days) 3 6 7 42 7 12 14 30 10 14

Immediate Preceding Activity

-

A B C D E F G H I J

Inception brief Feasibility studies Outline proposal Planning approval Scheme design Sketch plan Obtain finances Building plan approval Detailed design Working drawings

A B B C B B D.E.F D,E,F D,E,F

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You are required to establish the following: a) The network model to represent the logical sequence of activities and how long it will take before a decision can be made on the suitable site. (10 marks) b) The float available for each of the non-critical activities. (8 marks) c) If it is necessary to reduce the time taken to complete the whole exercise, which stages should be considered. (3 marks) d) If the activity of planning approval could be implemented in only 41 days, what effect would this have on the total duration of the study? (4 marks)

END OF QUESTION PAPER

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