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Concerns the real estate holdings of a recently privatized utilities business. The holdings consist of two leasehold business office premises and 13 freehold line depots…
Concerns the real estate holdings of a recently privatized utilities business. The holdings consist of two leasehold business office premises and 13 freehold line depots. The proposed strategy is to rationalize these with regard to the forecast future growth of new services in the district. The strategy comprises an office scenario and three service depot scenarios. Options are tested using a form of cost‐benefit analysis. The disposal of surplus properties is to assist in realizing the strategy. Uses a case study of the office scenario to describe the financial analysis. The options include do nothing (i.e. continue to use the existing depots in several locations ‐ the status quo); lease single premises; buy premises (i.e. an existing building) and build new premises (i.e. buy a site and construct purpose‐built accommodation). The lease option and the buy option are illustrated. Employs after‐tax discounted cash flows to model initial costs, recurring costs (rentals where relevant, energy costs and other operating costs) and annual savings (reduced payroll due to operating efficiencies). Net present costs are calculated in order to rank the options and these results cleary show that the lease option is preferable to the buy option.
Uses a life cycle costing case study to describe a technique useful to facilities managers in a decision about the acquisition of plant and equipment. The case study…
Uses a life cycle costing case study to describe a technique useful to facilities managers in a decision about the acquisition of plant and equipment. The case study investigates floor coverings in commercial buildings. Provides detailed financial calculations and incorporates a number of innovations. First, all the costs and benefits are included; life cycle costing is commonly promoted on a cost‐only basis, but all building expenditure generates a value effect and this must be measured in any meaningful study. Second, the choice of discount rate may be relieved by either sensitivity analysis or by the calculation of a “break‐even” discount rate; discusses these. The results show that vinyl is nearly 50 per cent more expensive than carpet and that the replacement of vinyl in an existing building with carpet has a payback of about three years.
The importance of taking corporate real estate decisions given a cyclical property market is discussed and illustrated. Ownership and leasing are described. Commercial lease terms are discussed in the context of the recent property cycle in Melbourne, Australia. A case study shows that the profitability of business units can be severely affected if the lease fundamentals, particularly the rent review mechanism, are misunderstood.
One form of property development incentive is the provision of tax shelters by way of tax depreciation allowances for buildings and parts of buildings. Since a tax depreciation allowance can only be claimed against income from the subject property, or from another source, in order to assess the effect of the allowance, some form of after tax analysis is required. After tax analysis for both capitalisation and cash flow techniques is described and illustrated. Furthermore, slices of equated yield attributable to the main components of return from real property are demonstrated.
Discounted cash flow (DCF), whether by capitalisation or by cash flow analysis, has many detractors because of a number of apparent problems such as the reinvestment assumption and the possibility of multiple rates of return. The capital recovery cum reinvestment aspects of Years' Purchase (YP) factors and DCF are discussed and it is demonstrated that Years' Purchase single rate principle is akin to Internal Rate of Return (IRR) and that Years' Purchase dual rate principle also has a DCF image known as the Modified Internal Rate of Return (MIRR). The difference between the YP models and the DCF models is to do with the level cash flows assumed in the former and the variability of the cash flows measured in the latter. MIRR was developed as an answer to the above problems and it is demonstrated in a case study in which the fallacy of the apparent problems is also demonstrated. MIRR has a place in the analysis of investment strategy, but IRR (equated yield) is shown to be satisfactory in the financial analysis and comparison of individual projects.
This paper synthesises the mortgage‐equity capitalisation technique, often used in property investment analysis and valuation practice in the United States of America, and the equated yield technique used in the United Kingdom. The mortgate‐equity technique considers two components of value, namely, debt and equity. It is usually applied to the nett income receivable in the first year, (conventional income capitalisation). Equated yield is a form of cash flow analysis which allows for the assessment of rental income projections. The combination of the two techniques, where debt capital is treated as an actual series of cash flows, leads to a discounted cash flow rate of return being available for equity capital. This measure should be of interest to property companies and occupying investors. The approach is demonstrated using a simple example, and some sample tables of equated yield on equity are appended.
The increasing complexity of investment properties has necessitated the application of more advanced valuation and analysis techniques. Following the property cycle of the…
The increasing complexity of investment properties has necessitated the application of more advanced valuation and analysis techniques. Following the property cycle of the 1980s/1990s, and the recommendations of several reporters, the DCF method has been promoted in Australia for certain income‐producing properties. The Australian Property Institute disseminated an information paper in 1993 that discussed DCF and suggested a performance approach to its application. Following this, a practice standard was produced in 1996 that was highly prescriptive but which contained a number of confusing passages. With the benefit of hindsight, its publication was premature and it was withdrawn from circulation. A rewrite was commissioned and an exposure draft was circulated in early 1999. It has been prepared as a performance standard in which the valuer is called on to follow a method while disclosing the specifics. However, a number of considerations remain to be finalised, for example, the application of the term cash flow to net operating income, income after finance and income after finance and tax. The preparation of standards is an evolutionary process and the present coverage of the DCF practice standard reflects the market in which it applies.
This paper aims to identify and examine the determinants of downside systematic risk in Australian listed property trusts (LPTs).
Capital asset pricing model (CAPM) and lower partial moment‐CAPM (LPM‐CAPM) are employed to compute both systematic risk and downside systematic risk. The methodology of Patel and Olsen and Chaudhry et al. is adopted to examine the determinants of systematic risk and downside systematic risk.
The results confirm that systematic risk and downside systematic risk can be individually identified. There is little evidence to support the existence of linkages between systematic risk in Australian LPTs and financial/management structure determinants. On the other hand, downside systematic risk is directly related to the leverage/management structure of a LPT. The results are also robust after controlling for the LPTs' investment characteristics and varying target rates of return.
Investors and real estate analysts should conscious with the higher returns from high leverage and internally managed LPTs. Although there is no evidence that these higher returns are related to higher systematic risk, there could be the compensation for higher downside systematic risk.
This study provides invaluable insights into the management of real estate risk in Australian LPTs with implications for REITs in other countries. Unlike previous studies of systematic risk in REITs or LPTs, this is the first study to assess downside systematic risk and explore the determinants of downside systematic risk in LPTs.
The comparison of appraisal and valuation techniques between countries must ideally review methods currently used by practitioners. In the absence of such detailed research, an impression of current practice can be gleaned by comparing recent articles in the main valuation journals in the UK and the USA. This analysis, while not definitive, suggests that certain techniques, such as discounted cash flow, are more readily accepted in the US than in the UK.