Real Estate: Project Modeling and Decision Methods - Term Paper Example

Real E Project Modeling and Decision Methods Affiliation: Table of Contents Table of Contents 2 Executive Summary 3 2. Spreadsheet Model 4 3. Assess Investment 5 4. Research 5 5. Central London Office Property Potential Purchase 6 6. Marketing Brochure 9 1. Executive Summary In Real Estate, regardless of geography, there are a few prevailing factors that inadvertently dominate the decision of investors. The attempt here is not just to identify an actual property with specific number of tenets keeping the limit in consideration but to also be able to reflect and leverage the inference drawn to other similar properties with appropriate portfolio. In our study we aim to explore an actual property in Central London. While there is no official or commonly accepted definition of its area, however certain attributes of this zone which is of prime importance is a high density built environment, high land values, an elevated day time population, a concentration of regionally, nationally and internationally significant organizations and facilities. The approach is primarily to evaluate property realistically of a specific location. In this exercise, we capture the trends in the past, make relevant assumptions of the future, address some challenges that can be foreseen and arrive at a conclusion. The simulation and the spread sheet model rationalize the decision and support the analysis to strengthen the reasoning behind potential investments and an assessment of the associated risks, if any. This paper applies structural methodology to estimating and forecasting the Central London office market. We assemble a time series covering for over a decade and estimate equations for net space absorption, movements in rents, and new building orders and other facilities along with new flourishing businesses. We also estimate a typical supply and demand relationship that yields a dynamically stable system. 2. Spreadsheet Model A spreadsheet model is an effective instrument for quantitative estimates based on a specific framework. The excel sheet embedded in this article is an illustrative version for capturing similar data for any property identified with required criteria in the prime location of Central London. While it a conscious decision not to engage in advanced computerization as it is not a pre-requisite, but ideally one of the outcomes of good asset management. The spreadsheet model suggested here is a methodological tool for understanding and improving the assessor's ability to consider all factors in Real Estate Project Modeling and deriving decisions accordingly which will also facilitate the process of financial planning and expectations. The logic of the framework and the attached spreadsheet model is fairly simple and follows the approach tested and used by Project owners. At the very outset, we should make quantified entry assumptions about parameters that define the total cost of office property in Central Location. The model calculates the estimated cost and the anticipated returns. The key assumptions cover the following: Various costs per unit (such as land acquisition price per square feet, construction cost per square feet, costs of various furniture pieces, etc.) Space needed for Office Equipment and furniture required Costs of each component (Furniture, Total capital cost (land, building, equipment/furniture) For all the apparent simplicity of this framework, it still establishes a clear hierarchy of parameters: thus, the area of the location (i) Prevailing rate per square feet area and (ii) space utilization 3. Assess Investment The whole exercise is primarily to assess investment and every smart investment provides long-term capital appreciation and immediate, consistent rental yields however while modeling the project we need to have all the facts at our disposal. The prevailing rates of property based on the location chosen Establishment costs will always be significant, with stamp duty, legal and surveying fees and related costs on a case to case basis. Furnishing costs, initial equity contribution is often higher than anticipated. Capital investment must be balanced with projected income which means understanding what rent you will get and your running costs. 4. Research Reports reflect that the London office market experienced a pronounced office cycle across the late 1980s and early 1990s, as did many other major financial centers in Europe and Australiasia1 Rapidly increasing rents and capital values gave way to oversupply, high vacancy levels and falling prices, consequent to which extraordinary quantities of space came on line concurrently with the onset of a recession. The consequences of the real estate crash fed back into the broader financial system through adverse impacts on institutional investment performance, bank bad-debt provisions and asset values of the corporate sector. The City of London office market is of interest in part because it behaved similarly to those of numerous other major cities. This market is of special interest because of its international character: 34% of office space is occupied by non-U.K. firms, and 20% is owned overseas2. The dependence of equilibrium rents on real interest rates and of property values on rents provides a direct link from the capital markets to the property markets. It is not just analysis of the rental adjustment process but also linking that adjustment to real interest and estimates of the demand for and supply of space that completes the assessment. The resulting model is used to simulate the effects of changes in employment growth and in real interest rates on the system. The model is able to track the wide cyclical variation in the vacancy quite well in a dynamic simulation where all "errors" are allowed to build (simulated rather than actual values of lagged endogenous variables are employed). Moreover, the observed severe cycle in employment growth and the surge in real interest rates explain the equally severe cycles in real rents and vacancies. With employment and interest-rate fluctuations removed, the model generates a stable rent path with a minor cycle in vacancy rates. 5. Central London Office Property Potential Purchase 1. Reasoning The basic reasoning and logic behind the choice of the location is the extensive study based on real estate trends. The interest in London Central as an alternative asset class is high on the list. It is not only an intelligent, international, investment market which has a fairly low correlation with other asset classes and to the national domestic housing or any other office market. It represents good stock, which can provide significant performance and diversification benefits in a balanced portfolio. It might currently be unforeseen however the effect of hosting any international event is likely to enhance values in near future and beyond, which will provide a further stimulus to the market. In all scenarios considered, regardless of any other external factors influencing the investor's decision, one aspect that remains constant is the demand of the location for obvious reasons stated above which is not going to change in the near future. The very characteristics of the location are the primary reasons for its standing above average in terms of preferred choice for investment. The analysis strengthens the concept and speaks volumes of its appraising value. However the threat would be lose out on that demand which seems a remote chance at this point of time. 2. Why was this rental growth property chosen In recent years, several studies have examined the cyclic movements in different markets. Even if a specific rental growth property is chosen, ahostof other usefulquantitativeinformationassists in project modeling and provides us with investmentdecisions. For example, ifwecansellat8%,ourreturnwillbe20%givena, b and c variables included in our model. All models have specific value determined which brings one question to the table regarding how the model would perform if there is some uncertainly. Keeping the past trends, previous projects and the performance statistics of all the stakeholders involved in the Property, this rental growth property has been chosen. This period is independent of the recent recession and other factors which are derivative of it. The real estate market is recovering and this period is not too away from present and not too far into the future. The outcome of a similar analysis for a different period would not serve any other purpose except to capture trends and facilitate any analysis for the future. 3. What market reports did you used to reach your decision The reasons for complexity in real estate model building include but are not limited to various factors like Real estate is a complex highly structured asset, high level of domain knowledge is required, complex lease terms as well as business prospects, asset varies from property to property and country to country, long cash flow projections needed before regular patterns in income, fictional as well as existing leases usually needed for multi-let property and large number of variables in large/complex projects. The reports that have been extensively used are the various trends of captured in the website of real estate agencies, a few of them are listed in the reference section. The reports provide adequate guidance to make realistic assumptions, offers enough insight to build notions and concepts of the real estate world and enable an investor to take informed decision. 4. Why did you choose this hold period The model assures the opportunity of a generation with the congruence of discounted prices, cheap debt and currency wise, a soft sterling. Investors have been holding back trying to recover or make up for the downward movement in the market, but with the renewed surge of interest, it is likely that the recent fall in prices is coming to an end and that the market will see a rapid reversal. It is this period that will capture the momentum of the trend and investors in real estate for office property in such prime location can see the result of their investment during this period. 5. Explain your choice of yield and exit valuation method. The demand of a particular property evolves based on the environment it is exposed to. Office Property in Central location would impart better yield than anticipated, keeping not just the cash flow or the profit but the rental aspect in view. 6. Opportunities and threats a). Market A review of the data on office building construction and vacancy, reveals a recurrent ten-twelve year cycle. The office market appears to clear quite slowly, and long-run expectations play an important role in market behavior. Second, supply is definitely more responsive to market conditions than demand. Finally, a six-year forecast suggests that the current over-supply in the market will not go away as fast as in the past. The only possible threat is any other external factor, that could bring upheaval in the market to upset the project model in any ways b). Tenancy schedule The Tenancy schedule considered for the study is five years which is adequate to capture trends and evaluate the success of a model based on assumptions, risk assessment and anticipated growth. 7. Is this a good market investment Based on the recent market behavior and the associated life style along with the spreadsheet analysis, ideally it is just good market investment and not really great considering the future in all scenarios - optimistic, pessimistic and original. While profit on cost is around 25%, any unforeseen factor not considered in the analysis could neutralize this gain unless other rental and residual income is substantially high. 6. Marketing Brochure York House, 23 Kingsway London www.yorkhouse-kingsway.co.uk - This 4-page brochure for CB Richard Ellis helped let four floors of office space in WC2. Cited Work http://www.londoncentralportfolio.com/The-Market/Latest-Market-Movements/London-Central-Investor-Track-All.aspx http://www.enticottdesign.co.uk/portfolio/brochures/cbre_property_brochure.htm The Workings of the London Office Market - Journal article by Patric H. Hendershott, Colin M. Lizieri, George A. Matysiak; Real Estate Economics, Vol. 27, 1999 Read More