Coronation Investments plc - Book Report/Review Example

?Coronation Investments plc. Contents Introduction 3 Question1 5 Project Viability 5 Project Feasibility 6 Question 2 11 Question 3 14 Reference 16 Appendix 18 Introduction Coronation Investments is a construction firm that is involved in developing multi-unit city centre retail projects. These units are offered on lease to the various interested companies and are sold subsequently when the lease agreement period gets over. Coronation Investments plc gets funding support from their merchant bank only when the ‘blue chip’ businesses sign lease agreements with them for the units developed. The company has the option to acquire a site in the central part of Southernsby, a south coastal town of the UK. Already major retail chains have started showing interest in this project and in obtaining the units that would be developed by Coronation Investments. The primary trading time for the leases usually cover the early summer days and the Christmas time and the favored months for moving in are April and October. However the lessee wishes to have access to the units as soon as possible. It is assumed that all other firms interested in the project would go for the similar timing preference. A period of 2 months has been allotted between the time of completion of the units and handing over those units to the retail firms. Any failure to comply with the agreed dates could lead to withdrawal of the deal and could give rise to related disputes. The outline of the development plan showcases a combination of retail and office space. The specifications of the plan has been stated below- Car Parking The initial car parking element of the appraisal figures have remained. This is due to the fact that the public spaces equate to ?5.30 per day and the reserved spaces equate to ?6 per day. Long term leases for reserved spaces will be paid for by companies who would lease office space etc and this will be calculated depending on the number of spaces, thus ?6 per space will be kept as an arbitrary figure for the purpose of this appraisal. For the public spaces, a typical city centre shopping centre such as the multi-storey car park connected to West Quay Shopping Centre in Southampton list all day car parking at ?5 (West Quay Parking). Thus the figure of ?310,000 is fit for purpose (as [?310,000/160 spaces/365 days = ?5.30 per day]). As this is a mixed development of office and retail the Parking Standards stipulates Class A1: Shops minimum 2 spaces per unit or 1 space per 500m2 for non food retail and Class B1: Offices minimum 2 per unit or 1 per 20 staff whichever is the greater. As we are unaware of clients who or staffing the amount of spaces will also remain the same. Public Areas Public areas no rental yield, however there is a possibility of leasing spaces for advertisements, albeit the income varies greatly depending on size, locality within the building etc, thus a ?5,000 arbitrary figure has been added for consideration. Kiosks & Atrium Cafes As the design/layout of the building isn't known these figure remains the same. However the original appraisal had a mistake one atrium at ?20,000 with ?40,000 total, this has been adjusted. Shops & Offices The initial appraisal figures were somewhat on the low side and these have been adjusted in accordance with figures taken from Valuation Office Agency 2011. It must be noted that zoning is taken into account when valuing property, Zone A is classed as the most expensive part of a retail outlet and this is the first 6.1m from the front of the shop, then Zone B is 50% of A, Zone C is valued at 50% of B etc. The ?2,800 (Southampton) amount shown in Appendix A.1 is only for Zone A. Because the design of the retail area is unknown Zone A figures has been ignored and the value of ?250 has been used. Southampton has been chosen due to it being a south coastal town with similar attributes to Southernsby. The offices price per m2 has also been adjusted in accordance with figures from the VOA. Question1 Project Viability When a project is undertaken the managers make it sure that the project contributes sufficiently towards the attainment of the business objectives. Thus a project framework is developed to ensure the maximized and systematic achievement of the key objectives. The factors that influence the viability of a project are- Cost Overruns- This refers to an unwanted increase in the cost involved in the project. An increase in the cost of project can cause reduced rate of return on the capital invested. Time Overruns- When the specified time for the project expires and the project team fails to deliver the completed project within that time then it gives rise to several disputes and even withdrawal of the contract. Flexible to changes- With the development of the project the various scopes and specifications tend to change and it is inevitable for any project. Thus a project needs to remain flexible throughout each stage so that the required changes could get implemented as and when needed. Quality issues- Every project plan set some standards for the proposed project. However it’s not always possible for the project managers to maintain the exact standard of quality throughout the entire project. Thus the variation in quality could impact the acceptability of the project and in turn the benefits derived from the project by the client could also get affected (Oxford Brookes University, n.d.). Variations in the business scenario- There arises certain situations within the organization which compels the project to change its course. A project faces various factors that make it a success or a failure. Thus there should be provisions for such variations in the project plan. Thus it can be concluded that the viability factors are mostly related to the uncertainties of the future. These factors are out of the owner’s control. However the cost overrun and time overrun could be controlled when the project is commenced with a proper plan as well as a proper monitoring & evaluation technique (M & E). M & E a Monitoring & Evaluation system is necessary for the measurement of the progress of a project. A continuous review of project implementation against the settled schedules and the proper utilization of the available resources make the work simpler and faster. It is a system for providing regular feedbacks to the person in charge of the project and to the related stakeholders. The main components of an effective M & E involves- People- The creators and customers of information and organizational frameworks. Data- Significant items of implicit and explicit knowledge Procedures- These implies the practices, know-how and rules that allows collecting, processing and distribution of information. Technology- This include the various software, hardware, infrastructure, communications, publication formats, journals etc. (mande.co.uk, n.d.) Project Feasibility It is the first stage of the entire project development process. The feasibility stage evaluates the hazard and prospective of the project to enable the owner to make a decision regarding whether to carry on with the project, to suspend it or to stop it (Dykstra, 2011, pp.59-68). The feasibility study involves the project and location evaluation, recognizing the key project objectives, the initial budget, essentials of the schedule, commitments in funding and opting for the appropriate means for project delivery. During the feasibility study the owner must consider reviewing six broad issues. We will discuss these issues with respect to the situation of the Coronation Investment plc.- 1. Needs assessment- This part of the study deals with the project objective. The project owner looks for the answers to the following questions to clearly define the objectives of the project: What are the needs of the local market?- There is a demand for retail chains in the area of Southernsby and when the construction firm opted for buying a site there, the major retail chains started showing interest in the project. (Assumed) Who are the potential users? - The potential users would include the local residents, visitors from outside and the people who will be working in the offices within the building. Also the people who will be visiting the park and the adjacent shops and offices are also likely to visit the unit. (Assumed) What amenities would be necessary to make the project competitive? – All the modern amenities that can be found in other city centers should also be present at the project undertaken by Coronation, like gym, food court, gaming zone, car parking, bar, escalator, elevator, fire prevention systems etc. These would require a considerable amount of capital and resources. (Assumed) 2. Site selection- The site is located at the central part of a large south-coastal town of the UK. At present a retail unit is running its operations at the 0.6 hectare site. A supermarket and a 10 storey office building are already present in the adjacent area of the site with their fronts facing the North Road. The back of the site has a park which borders a railway line. The adjacent portion of the site has service roads and the rear part of the site also consists of a few service roads. The actual site design is shown below: It can be said that the selected site would help the firm to draw people who previously used to visit the supermarket and the adjacent office. Also the visitors of the park can be expected to visit the unit. Moreover the already established service roads would eliminate the company’s cost of building new roads (Bryce, n.d.). 3. Financial feasibility- It involves the cost of the project, the risk involved and the expected profit. In this project we already have the estimated costs and the profitability and risk involved can be estimated with the help of the NPV and IRR. Net Present Value determines the profit expected from a project. The computation is done by the simple estimation of the total assumed cash inflow from a project minus the total cash outflow. Thus Net Present Value (NPV) = Present Value (PV) – Cash Invested. When the NPV of a project shows a positive result then the project should be continued or else it should be dropped (LSE, n.d.) The break-even can be traced at the particular point where the NPV is equal to zero (Preece, 2009).The Internal rate of return (IRR) is the rate of return on an investment. The IRR is the discount rate which will offer the project an NPV of zero. Generally IRR is estimated by trial and error process (money terms, 2013). As the vendor is opting for auction of the land therefore competition is likely to increase. The calculation of NPV and IRR have been shown below- Year Cash Flows (?) FVIF @ 10% Future Value (?) 0 -29,591,197.00 1.000 -29591197 1 1,834,000.00 1.100 2017400 2 1,834,000.00 1.210 2219140 3 1,834,000.00 1.331 2441054 4 1,834,000.00 1.464 2685159 5 1,834,000.00 1.611 2953675 6 1,834,000.00 1.772 3249043 7 1,834,000.00 1.949 3573947 8 1,834,000.00 2.144 3931342 9 1,834,000.00 2.358 4324476 10 1,834,000.00 2.594 4756924 TPV 32152160 NPV 2560963 IRR 1.3% We can see from the above calculation that both NPV and IRR (at 10% discount rate) are positive and it would prove to be profitable for the project. A profitable project would help the firm to gain customer’s faith and loyalty. Hence it can be said that the project is financially feasible (DWP Credit Union Expansion Project, 2012). 4. Schedule feasibility- The schedule that has been fixed for the Coronation Investments is 2 months between the date of completion of work and the moving in of the retails and offices. However no fixed schedule has been provided for the completion of the entire project. 5. Community values- This is the final step in the feasibility study which assesses any possible community or political issue that may arise due to the inception and execution of the project. Sometimes a project may prove to be theoretically permissible but contentious. Thus it should be kept in mind that the project undertaken by the coronation investments must not cause harm to the already existing office and supermarket adjacent to the site and also to the park and railway track. It might happen that the service roads might remain blocked during the construction work which might cause inconvenience to the general people. Also the dust pollution and any other type of pollution could give rise to protests from the health conscious citizens and the parents of the children who play there. Thus from the needs assessment, financial feasibility, and site selection point of view the project seems to be feasible however the project might face difficulties from the terms of schedule and community values. The Net Present Value shows an amount of ? 76134 and the IRR rate is 5.2% at which the project would be feasible (Designing Buildings Wiki, n.d.). Question 2 Risk is a vibrant structure which is not caused due to a sole failure but involves many sources contributing to the happening of the failure and therefore risks are considered as complex (Kambil & et al, 2005). Risk can’t be controlled but the owner can have control on the expenditure if the risk could be anticipated in advance (Henry, 2007). The Royal Institution of Chartered Surveyors (RICS) stated in their report that construction industry of the UK is gradually recovering after the horrible blow of recession. More workload has been reported during the second quarter of the current year. However gathering finance for the projects still remains a challenge for the industry (The Construction Index, 2013). Also it can be expected that the Health & Safety Executive’s Budget set by the industry would be reduced to a significant extent by 2015 (Campbell, 2013). This step would increase the accident and death rates at work and would discourage the employees to join the industry in the coming years, thus creating a pool of vacancy. The public private partnership projects prove to be a significant source of construction funds but involve high risk as there is a time-lag between tendering for a project and receiving the income. Lack of skilled worker and logistical challenges encompasses a major portion of the construction risk (PWC, 2013). The environmental issues also comprise a large portion of the risk involved in a project. Additionally the increasing trend of tax as shown in the chart below can prove to be a potential risk for the firm- Source: www.kpmg.com Apart from these risks there exist several uncertainties which may include a change in the market price of land or materials or some the occurrence of some economic downturn. The Sensitivity Analysis shown below and the graphs define this situation- Cases Worst Most Likely Best Developer Margin @ 20% 15% 10% Margin 554530.6 415897.95 277265.3 Total Expected Income 36,680,000.00 36,680,000.00 36,680,000.00 total Expected cost 29,218,705.00 29,218,705.00 29,218,705.00 Profit 6,906,764.40 7,045,397.05 7,184,029.70 Here we have considered three cases, worst, most likely and best and the situation has been predicted in case of each scenario. The strategies for coping with these risks are- Installation of the various risk management software & tools namely Predict! Risk Controller, Risk ID Pro, Risk Radar, CRIMS, SCRAM, REMIS etc (Dikmen & et. Al, 2004). Getting the project insured by a well known insurance company for preventing the uncertain risks that might root from the changing business environment and hazards caused from natural calamities (AON, 2013). The collaborative approach of risk management can also be considered as a strategy for coping with the risks in the construction industry. The government is focusing on the promotion of this approach with a belief that collective responsibility would result in improved allocation and tackling of the involved risks (McDonald, 2013). Question 3 The effects of the variation in yields have been shown below- Yield @ 7% 8% (20 Years Purchase) 14.78359932 15.64548746 Capital Value 36,680,000.00 53,780,735.10 Cost 29,591,197.00 29,591,197.00 Benefit/Profit 7,088,803.00 24,189,538.10 In the above calculation we can find that two yield rates have been considered i.e. 7% and 8%. The yield at 7% shows around 14.78 years purchase while the 8% yield shows 15.64 years purchase. Also the capital value is more for 8% and the profit amount is also more for the 8% yield. In both cases the cost remains the same. A higher yield would offer the firm a better risk management mechanism by maintaining a provisional amount for the future risks and it would also bring greater profits for the company (INVESCO, 2013). Therefore, the 8% yield would prove to be more profitable for the firm. Reference 1. AON, 2013. Construction Risk Management. [Online] Available at < http://www.aon.com/unitedkingdom/products-and-services/industry-expertise/construction.jsp> [Accessed 14th August 2013] 2. Bryce, T. n.d. The Elements of a Good Feasibility Study. [Web] Available at < http://www.projectsmart.co.uk/elements-of-a-good-feasibility-study.html> [Accessed 14th August 2013] 3. Campbell, A. 2013. UK construction workers 'at risk' since government cuts. [Web] Available at < http://www.bbc.co.uk/newsbeat/23251310> [Accessed 14th August 2013] 4. Designing Buildings Wiki, n.d. Project Plan: Public Project. [Web] Available at < http://www.designingbuildings.co.uk/wiki/Public_project:_feasibility_studies> [Accessed 14th August 2013] 5. Dikmen, I & ET. Al, 2004. A CRITICAL REVIEW OF RISK MANAGEMENT SUPPORT TOOLS [Pdf] Available at < http://www.arcom.ac.uk/-docs/proceedings/ar2004-1145-1154_Dikmen_Birgonul_and_Arikan.pdf> [Accessed 14th August 2013] 6. DWP Credit Union Expansion Project, 2012. DWP Credit Union Expansion Project-Project Steering Committee-Feasibility Study Report. [Pdf] Available at < http://www.dwp.gov.uk/docs/credit-union-feasibility-study-report.pdf> [Accessed 14th August 2013] 7. Dykstra, A. 2011. Construction Project Management: A Complete Introduction. USA : Kirshner Publishing Company. 8. Henry, A. 2007. The Internal Environment of an Organization. London: Oxford University Press. 9. INVESCO, 2013. INVESCO High Yield. [Pdf] Available at < http://www.institutional.invesco.com/portal/file/invescoinst/pdf/II-IFIHY-FCT-1-E.pdf> [Accessed 14th August 2013] 10. Kambil, A. & et al. 2005. Disarming the Value Killers in Strategic Risk. [Pdf] Available at < http://www.corpgov.deloitte.com> [Accessed 14th August 2013] 11. LSE, n.d. Net Present Value Definition. [Web] Available at < http://www.lse.co.uk/financeglossary.asp?searchTerm=&iArticleID=649&definition=net_present_value> [Accessed 14th August 2013] 12. mande.co.uk, n.d. Definitions of an M&E System. [Pdf] Available at < http://mande.co.uk/blog/wp-content/uploads/2008/05/january-2009.pdf> [Accessed 14th August 2013] 13. McDonald, T. 2013. Collaborative Risk Management in the Construction Industry. [Online] Available at [Accessed 14th August 2013] 14. money terms, 2013. IRR. [Web] Available at < http://moneyterms.co.uk/irr/> [Accessed 14th August 2013] 15. Oxford Brookes University, n.d. What is project viability? [Online] Available at < http://www.brookes.ac.uk/services/hr/project/survival/viability.html> [Accessed 14th August 2013] 16. Preece, D. (2009). Organizations and technical change: strategy, objectives and involvement. London, Routledge. 17. PWC, 2013. Industry issues. [Web] Available at < http://www.pwc.co.uk/engineering-construction/issues/index.jhtml> [Accessed 14th August 2013] 18. The Construction Index, 2013. RICS calls it: recovery has begun. [Web] Available at < http://www.theconstructionindex.co.uk/news/view/rics-says-construction-recovery-has-begun> [Accessed 14th August 2013] Appendix Investment Appraisal Assessed Value ? Income: Car Park 160 public spaces say 310,000 40 reserved office spaces say 90,000 Public areas Advertising space 5,000 Kiosks 2@ say ?10,000 20,000 Atrium Cafes (mistake) 1@ say ?20,000 40,000 Shops 3700m2 @ ?250/m2 925,000 Offices 2400m2 @ ?185/m2 444,000 ---------------------------- Total Income 1,816,000 Yield @ say 7% = yp14.2857 (20 years purchase) 20 x ?1,816,000 = ? 36,320,000 (Capital Value) Estimated Costs Demolition & treatment of land 0.6ha @ 900,000 per ha 540,000 Build Costs: 3,700m2 shops (shell & core) @ ?695 average costs 2,571,500 2,400m2 offices @ ?1,400 3,360,000 Public areas (Atriums and Hallways) 1400m2 @ ?1975 2,765,000 Elevators (6x13 persons) @ ?66,306 397,836 Ancillary Costs Car parking and ramps 11.52m2x200x400 921,600 Access roads say 1,000m2 @ ?5.81 5,810 Landscaping say 500m2 @ ?23.00 11,500 Services Shops @ ?510 1, 887,000 Offices @ ?475 1,140,000 13,600,246 Professional fees Architect 1% +VAT @ 20% 163,202 Quantity Surveyor 1% +VAT @ 20% 163,202 Structural Engineer 0.33% +VAT @ 20% 53,857 Contingencies Say 5% of costs of construction 680,012 Inflation until tender 2.7% 367,207 Inflation at mid point in construction programme 1,101,620 Finance Short term finance (construction period) 1,000,000 Short term finance (letting period) 1,000,000 Letting and sales fees @2% of construction cost 272,005 Marketing and advertising 83,000 18,484,353 Developers profit @ 15% 2,772,653 Land cost (estimate residual value) 5,952,994 Finance and fees on land purchase 2 years@ 20% 2,381,198 Total estimated development costs 29,591,197 Read More