QUESTION 1 (This question has three parts, (a) , (b) and (c) )
Discuss the following questions in detail:
- We have seen rapid growth of the residential property asset value in most Australian capital cities since the end of 2020. Do you think there are systemic risks in the current housing market that could cause the financial crisis as what happened in the 2008 subprime mortgage financial crisis? Explain why.
- The COVID pandemic has changed the world of work for many people . Do you think the DCF model could provide more accurate valuation results for office property than DCM model does in the current market situation? Explain why.
- Do you think the investors who want to enter the property market in the near future should adopt negative gearing strategy in property investment? Explain why.
QUESTION 2 (This question has three parts, (a), (b) and (c))
- The ING Group wants to invest in an industrial property which is worth $20,000,000. This property provides an average monthly net rental income (after deducting all the expenses and tax) of $128,000. The holding period of this investment will be 7 years, and the market value of the industrial property is expected to grow by 3% per year. Should ING Group proceed with this investment if their required rate of return is 10%?
- The monthly income of an investor is $9,000 per month, and up to 40% of the monthly income can be used to pay off a mortgage loan. The investor wants to get a 30-year mortgage loan with a 2.2% interest rate andP&I repayment method to be used. This mortgage loan can finance up to 80% of the property price, and the investor can provide $310,000 deposit. Assuming the investor does not need to pay stamp duty or other acquisition cost, can this investor purchase a property with market value of $1,250,000? Explain why.
- Robin buys a house valued $ 1,000,000 with a 20% deposit and the rest financed by a constant payment mortgage with a 2.4% annual interest rate. If Robin’s monthly income is $8000 after tax and half of his income is used to pay off the mortgage loan, when can Robin pay off the mortgage loan? If Robin wants to pay off the mortgage loan within 16 years, how much of his monthly income should go to mortgage?
QUESTION 3 (This question has three parts, (a), (b) and (c))
Abacus Property Group, a diversified property group listed on the Australian Stock Exchange (ASX), have asked you to evaluate an office building they would like to purchase. . You find the following information about this property:
Valuation date: Today Net lettable area: 7500m2
Current Market rent rate: $ 430/m2 per annum
Annual growth rate of market rent: 4% in first three years, and 3% after that Miscellaneous income: $6,000 per annum
Vacancy and collection allowance: 4% of potential gross income Operating Expenses: 10% of potential gross income
Depreciation: $90,000 per annum
No capital adjustment, acquisition cost or selling cost is required
You have also found the information about Abacus Property Group: Loan to value ratio for this investment: 30%
Loan annual interest rate: 4%
Expected rate of return on the equity of Abacus Property Group: 12% Corporate tax rate:30%
Holding period of property asset: 3 years
You have recently appraised the comparable sold evidence listed below:
| Comparable | NOI ($) | Selling price ($) | Weight based on similarity |
| 1 | 300,000 | 3,900,000 | 50% |
| 2 | 315,000 | 3,800,000 | 30% |
| 3 | 305,000 | 3,900,000 | 20% |
- Value the above property using the Direct Capitalisation Approach.
- Value the above property using the DCF model (investment value).
- If the purchase price is equal to the investment value estimated by DCF and interest-only repayment method is used, is this investment project feasible? Explain why.
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