Introduction To Construction The Management -Myassignmenthelp.Com

Question: Discuss About The Introduction To Construction The Management? Answer: Introduction Rental values are subjected to occasional rise and fall, hence the contractual rent, also known as Passing Rent, agreed upon in an existing lease is bound to differ from the current market value of rent. In case the passing rent is less than the value of the market rent, it is considered that the investment is reversionary. To evaluate the investment value of an asset, there are different methods employed by investors, depending on their internal contribution and the amount borrowed. In the current case, we shall be focussing on the Term and Reversion and the Layer / Hardcore methods for determining the Market Value of the property under consideration. Interpreting Valuations I will illustrate both the methods here, so that it is easy to understand the calculations and the results shown in the Table. We need to value the property under consideration by assuming that the Passing Rent is 1,125,000 per annum and this is expected to revert to the market rent valued at 1,148,000 per annum in about 7 years time, as per Baum Baum, (2015). We have established that the present value at 5.10% of 1 is shown in Table-02. Through Table-01 we have also established that the initial yield is 4.95% and the reversionary yield is calculated as 6.53%. The approach adopted here is known as the Term and Reversion Method and as shown in Table-03, the derived cash flow is considered as sliced vertically. I have also adopted an alternative approach and this also generates the same result. This method is the Hardcore Method and here the cash flow is sliced horizontally. The results have been shown in Table-04. For the benefit of the investor, I wish to make a note that the Total Returns shown in the calculations on the basis of 5.10% initial yield are not the investors total or overall returns. The 5.10%, all-risks yield, is notional and has been taken to imply that the actual rental growth, which is bound to increase the income generated during the holding period and will also help in producing a capital gain in the event of a resale by the investor. On these basis, it is safe to assume that the investor will be having a far higher overall rate of return, which may be somewhere between 7% and 9% p.a., asserts Myers, (2012). Interpreting Appraisals My appraisal commences with the summary of the listed office property as shown in the Data Table-01. I would like to point out that this investment may appear to be similar to a ten-year government bond. I am making this comparison by way of illustration as such bonds offer a yield of 4% and for the purpose of determining the IRR of this office property, the discount rate selected by me is also 4.38%. However, in case this same investment is made by the investor with keeping an initial yield of 6%, I would be suggesting that the investor is planning with an anticipated additional risk while determining the cash flow of the investment, keeping it over and above of the government bond, explains Baum, (2009). Although, in principal, I would say that all investment properties are bound to carry such an additional risk premium because of the liquid nature of the investments, according to Goodhart Hofmann, (2007). In the above cited office IPMS 3 property, the additional uncertainties in the above mentioned cash flow could include: The age of the office IPMS 3 property and would also include the inherent impact of its ability of re-let at the end of the current lease. There can be an uncertain but potential period of vacancy after the current lease expires and this in particular costs both time and money. Thus there can be connected uncertainty of the nature of political and economic issues as these can be affected by lack in occupational demand and lowering of market rents, in particular when the lease ends. There can be uncertainty which may occur due to slackness in future investment demand and this may affect the overall pricing of the property and may also increase the level of market risk, as per Karadimitrio, Magalhaes Verhage, (2013). The current data, shown in Table-01 has been described as Scenario-A in this report with the following basic facts about the IPMS 3 office property. Address Office A, North Street, Middletown Construction year 2015 Tenant Government Department Floor area 4,500 sq mtr Lease term 10 years, FRI, with 5 yearly, upward only, rent reviews (10 years unexpired term) Rent 1,125,000 p.a. (250 per sq mtr) Market rent 1,485,000 p.a. (330 per sq mtr) I have considered this Scenario-A only for the purpose of transactional evidence. The above noted uncertainty factors have been projected based on this scenario although it may not be possible to analyse accurately the impact created by each one of the listed factors on the final cash flow. I can safely say that any adjustments, made to the initial yield, shall be dependent on the differing characteristics of the property and also rely largely on the experience and skill of the valuer, aseert Ashworth Perera, (2015). Interpreting Analyses When I take on the interpretation analysis of the above noted Scenario-A and which has been tabulated with results in Table-05, 06 and 07, I may state that in most cases pertaining to property investments, investors have the tendency of adopting a quantitative approach. I have also adopted this approach and have assessed the Market Value of the property by assessing the worth of the property, using the market and investment criteria, as per Taylor, (2008). I have also applied measures to the individual items of uncertainty, which I have already listed above, and conducted a risk analysis to assess whether the investor is prepared to accept these inherent uncertainties at the price which is being demanded, says Taylor, (2008). Although the risk analysis approach adopted by me for this assessment has wider implications but it has been based on the practised cash flow approach. I must admit that the analysis may vary from the basic upside, downside, best case by not taking into account a more detailed sensitivity analysis of the individual input variables, such as rental growth, rental values, vacancy periods, exit yields, etc., depending on the nature of this particular investor, I have used the risk scoring models, such as Term and Reversion and Hardcore Method, as per Robinson et al, (2015). It is an established fact that this same approach is usually adopted by financial institutions when providing debt finance. However, banks unlike investors, focus less on risk of being unable to obtain a particular return on the investment and focus more on: Risk of cash flow being insufficient for covering the interest payments. Risk of the residual value of the investment, at the time of maturity of the loan, being insufficient in being able to repaying the outstanding laon balance, as detailed by Ostrowski, (2013). Interpreting Results In Scenario-A, I had made allowance within the enhanced purchase price, to the possibility of refurbishing the building after the expiry of its current lease. This does not remove the uncertainty of the buildings obsolescence and any future vacancy issues, but it allows the investor in making an assessment of the impact on his Target Return and in deciding whether it is acceptable, says Kirkham, (2014). To give an alternate to the existing scenario, I have illustrated, in Scenario-B below, considering a new debt finance, in the ratio of 65:35, whereas 65% is the borrowing and 35% is the investors contribution. This borrowing is considered to be secured against the IPMS 3 office building stated in Scenario-A above. At the time of maturity of this loan, which is in five years time, there will still be another five years time remaining for the lease term to expire, but this would not be of concern for the lender as there will not be any time-lapse in re-letting, asserts Lavender, (2014) . Even after allowing for a small downfall in the Market Value of the property during the loan term period, the probability of the borrower in not repaying the loan remains very low as the ability of the borrower in meeting the finance interest payments remains comfortable throughout the loan period, as per Towey, (2013). Thus, despite a shortening of the unexpired term of lease, the lenders cash flow has few uncertainties, has a low probability of default and thus is a low risk profile, says Pratt, (2010). On the other hand, the investors cash flow is positive, even if the shorter unexpired lease period has had a negative impact on the final value of the investment at maturity date, to the extent that this investment shows a geared IRR (Internal Rate of Return) of only 4.38% per annum, which is lower than what the investor had as the original target of 6.00%, as per Sherratt, (2015). Thus the uncertainty surrounding the potential cost of maintaining the vacant building, including the necessary refurbishment costs and including the level of rent achievable against new letting could be of importance for the investor if there is an acceptable return delivered in the medium term, says Myers, (2012). However, in another Scenario-C, I have tried to demonstrate that a lender may not be always insulated from the underlying uncertainties of the asset level cash flow. In this scenario, I assume that the same office property has now been occupied by two tenants: Address Office A, North Street, Middletown Construction year 2015 Tenant-1 Government Department Floor area 2,500 sq mtr Lease term 10 years, FRI, with 5 yearly, upward only, rent reviews (10 years unexpired term) Rent 750,000 p.a. (300 per sq mtr) Market rent 875,000 p.a. (350 per sq mtr) Tenant-2 Corporate House Floor area 2,000 sq mtr Lease term 10 years, FRI, with 5 yearly, upward only, rent reviews (10 years unexpired term) Rent 660,000 p.a. (330 per sq mtr) Market rent 700,000 p.a. (350 per sq mtr) In this scenario, an assumption has been made about the additional lease given to the Corporate House, which has been introduced when the government has only two years of lease term remaining. Here, the consideration is that the investor has acquired the property with a 6.5% net initial yield and the also that the lender is advancing loan in proportionately the same ratio and on the same terms. However, the level of uncertainty exists for both the investor and lender, as explained by Ostrowski, (2013). Conclusion In case the Corporate House vacates the property at the expiry of the lease term, there will be a fall in the interest cover ratio on the loan and this will create a breach in the terms of the loan agreement. Moreover, I am also taking into consideration the fact that there may be a likelihood that the Market Value of the cited property may fall to such an extent that the Loan to Value Ratio (LVR) rises above 75%, and this may possibly trigger another breach of the loan agreement. However, in my consideration, the biggest concern still will be effects of refurbishment and vacancy costs, which can affect the results of the cash outflow during the third year. Due margin needs to be provided for the uncertainty of the length of vacancy period, the extent of necessary refurbishment costs and also of the probability of finding a good tenant at the required rent and lease terms, as explains Baum Baum, (2015). These are some of the important issues which both the investor and the lender have to take into consideration at all times. In Scenario-C, consideration has also to be taken for the refurbishing of the vacant offices and re-let at 20 per sq mtr, after a void period of 12 months and another 9-month rent-free period. Taking such a scenario into consideration, it is imperative for the investor to achieve an IRR of around 8%, but this should be only one among a number of possible outcomes, out of which some may be less favourable. References Ashworth, A. and Perera, S. 2015 Cost Studies of Buildings, 6th ed. Routledge, Oxon. Baum, A. 2009 Commercial Real Estate Investment. Taylor Francis, London. Baum, A. and Baum, Prof A. 2015 Real Estate Investment: A Strategic Approach, 3rd ed. Routledge, Oxon. Godhart, C. and Hofmann, B. 2007 House Prices and the Macroeconomy: Implications for Banking and Price Stability. OUP Oxford, Oxford. Karadimitrio, N., Magalhaes, C. and Verhage, R. 2013 Planning, Risk, and Property Development: Urban Regeneration in the England, France, and the Netherlands. Routledge, Oxon. Kirkham, R. 2014, Ferry and Brandon's Cost Planning of Buildings, 9th ed. John Wiley Sons, West Sussex. Lavender, S. 2014, Management for the Construction Industry. Routledge, Oxon. Lester, A. 2013, Project Management, Planning and Control, 6th ed. Butterworth-Heinemann, Oxon. Myers, D. 2012 Economics and Property. Taylor Francis, London. Ostrowski, S.D.C. 2013, Estimating and Cost Planning Using the New Rules of Measurement. John Wiley Sons, West Sussex. Pratt, D. 2010, Fundamentals of Construction Estimating, 3rd ed. Cengage Learning, New York. Robinson, H., Symonds, B., Gilbertson, B. and Ilozor, B. 2015, Design Economics for the Built Environment: Impact of Sustainability on Project Evaluation. John Wiley Sons, West Sussex. Sherratt, F. 2015, Introduction to Construction Management. Routledge, Oxon. Taylor, J. 2008, Project Scheduling and Cost Control: Planning, Monitoring and Controlling the Baseline. J. Ross Publishing, Florida. Towey, D. 2013, Cost Management of Construction Projects. John Wiley Sons, West Sussex.