This assignment builds on the work completed in assignment 1 and expands your skill set with reference to advanced property development. It involves developing cash flow models for budgeting, as well as methods for estimating Net Present Value (NPV) and comparing project returns (IRR). These concepts should be familiar to you from material covered in MMP122 (Introduction to Property Development) and other PRE units, however we will re-examine these methodologies by working through examples from the text. You will be adapting these examples and applying them to your own project proposals for the ‘Woods’ development site.
During tutorials we have also talked about the economic climate and issues related to property development and investment. The readings provided each week are intended to prompt you to think about the various types of risk that a property developer can be exposed to, and how these risks might impact your project. With this in mind, you will also perform some basic sensitivity analysis. This will be achieved by undertaking scenario analysis and data table analysis using ‘Microsoft Excel’ and will be explained as we proceed.
Learning outcomes and skills development:
Each student should be able to complete the following. This assignment is designed to:
1.
Develop ability to evaluate a development project using multiple approaches, as well as the benefits and limitations of various analysis methods.
2.
Further develop ability to evaluate the financial feasibility of a project through the use of more sophisticated cash flow methods.
3.
Apply the time value of money and discounting approaches to valuation for use in property development.
4.
Undertake a cash flow analysis and perform NPV and IRR calculations.
5.
Demonstrate the impact that variations make on input assumptions and the effect of cash flow timing on a project’s sale value.
6.
Apply risk and calculation approaches that expose project vulnerability by considering a number of different development scenarios.
7.
Enhance student’s skill-set in the use of ‘Microsoft Excel.’
You are required to produce a report that includes the following information:
A brief summary of your property development project proposal (as developed in Assignment 1 for this unit). This should include the key points and conclusions drawn from your analysis of current and expected market conditions, highest and best use (HBU) analysis and marketing/sales strategy. Graphic material such as maps, photographs, and site plans (from your site analysis) can be included in an appendix. (Feedback given from Assignment 1 should be considered in this section also.)
a)
Using the ‘static’ residual land analysis calculation (from Assignment 1), perform a two-variable sensitivity analysis to investigate the effect on the land purchase price. The selection of the relevant variables must be based on your assessment of risk (from your research) and this must be discussed within your assignment. Discussion should also focus on the impact that any variation might have (including whether these are key risk elements).
Indicate the range of land value estimates that you believe are most likely.
Unfortunately, when market conditions change, it is likely that more than two variables in your analysis will be affected. Using your analysis from assignment 1 as a base case, develop ‘worse’ and ‘best’ case scenarios by considering the potential impact on all inputs. Discuss the impact on residual land values.
b)
Using example 3.4 from the text Property Development (2015) together with examples presented during lectures/seminars prepare a cash flow analysis for your project. The cash flow analysis considers costs and revenue over a number of explicit time periods, making the timing of cash flows and interest charges transparent. Expenditures and revenue for this exercise come directly from your residual land analysis (Assignment 1).
However, now you need to consider when each of these expenditure and revenue items will occur and how they are dispersed (for example, construction costs might follow the typical S-curve discussed at the top of page 97 of the text). Include discussion of your reasoning for deciding the likely timing of expenditure and revenue items in your assignment. Calculation of developer’s profit (both in dollar terms and as a percentage of profit on cost) should be included, per example 3.4 (or similar.)
c)
Use the appropriate cash flow series from your cash flow analysis (above) to calculate the NPV and IRR for your project. Explain what these terms mean, what they are calculating, and why a developer would use each. Discuss these values specifically in relation to your project.
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