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Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
Palm Jumeirah - Real Estate Final Project
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Palm Jumeirah - Real Estate Final Project

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Class project on developing a recommendation for an international real estate project: Palm Jumeirah in Dubai. …

Class project on developing a recommendation for an international real estate project: Palm Jumeirah in Dubai.
Part of GSBGEN 306: Real Estate Investment - Stanford GSB

Published in: Business, Economy & Finance
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  • Company profileWe are advising EJJ Properties in KuwaitMarket cap: $1.5B dollars3. Properties across Middle East-North African regionInvestment ObjectivesRecently sold $200M of property, looking to reinvest this equity. Crown Jewel Property. Long-term horizon, equity build-upHurdle rate of 20% to factor in the risk in this region. Company Profile:EJJ PropertiesEJJ Properties is a worldwide leader is developing prime residential and mixed-used properties. Based in Kuwait, EJJ currently has USD$1.5B in market capitalization. Its portfolio is spread around the MENA region. In the wake of the 2008 financial crisis, EJJ had to sell a large portion of its properties, including some of its prime gems, in order to stay afloat. From 2010 through 2012, EJJ regained much of its portfolio value due to the recovery of some of the real estate markets it was invested in. EJJ recently sold some of its properties in markets including Abu Dhabi and Bahrain, and is looking to reinvest about $150M of equity. It would like to invest in Dubai, as it is a safe haven compared to other MENA markets which starting to become volatile. Another core investment objective is to obtain new crown jewel properties to replaced the ones that were sold during the crisis.EJJ is currently in a stable position, having recovered well from the crisis, and does not urgently require immediate cash flow. It is looking toward a long-term investment horizon with handsome equity appreciation metrics. However, this also means that the investment environment must have moderate long-term safety in the form of stability. It has a hurdle rate of 20% for such investments.
  • I’d like to show you some pictures that reflect the rapid development of DubaiOne of 7 emirates in the UAE. Relatively small 2M population, Most of its residents are foreigners comprising of laborersPopulation growth rate 5.1%Tourist spending takes up about 55% of all retail spendingInteresting things about Dubai: No Tax: impact of leverage is less, and depreciation doesn’t matter. A lot more profit. Also, this no tax draws in expats to the regionIslamic Finance- Sukuk (higher interest), no bankruptcy law etc. Political Stability- safe haven in the area. For these reasons we think that Dubai is a safe play for a crown jewel property. Cons of investing in Dubai.
  • Market Overview pieceElaborationAt first glance, there is oversupply in the market. But upon finer analysis, oversupply is contained within the secondary markets.Demand for prime locations is increasing, and is reflected in both rents and valuesOccupancy for prime locations has stood at 98-100% consistently. Reflects market direction  increasing polarizationSecondary malls are struggling to maintain rents and values. Huge demand for prime properties as investors from the Middle East and South Asia are piling their investments into Dubai as a safe haven. Less so secondary properties in Dubai. Rental Clock: Jones Lang LasalleJust coming out of the bottoming phaseWant to capture the rental growth acceleration phase
  • Large commercial area: Dubai Internet & Media City. Free-zone & 3rd largest in size.Internet & Media = moneyRetail 2 malls but at 15mns drive. 2nd largest mall and neighborhood mall
  • We used 92
  • Residential10 floors~350 apartmentunitsMix of 1 bedroom, 2 bedroom and 3 bedroom units with 2 bedroom units having largest shareSimilar to other residential buildings on the islandRetail Mall5 floors of fashion-oriented retail offered in a more standard indoor format (to contrast with the open-air format of the lifestyle shopping in the mixed use option we’re proposing)Prime positioning next to the Nakheel mall located closer to the tip of the trunk, together serving as the epicenter of retail for Palm Jumeirah and all of DUbaiMixed Use10 floors of residential identical to residential option1 floor of lifestyle-oriented retail including retail stores and restaurants in an open-air formatMixed use would be a novel concept not only for the Palm Jumeirah but for Dubai in general
  • Performed a 10-year cash flow analysisStandard construction times of 1 year for residential, three years for the retail mall and three years for the mixed use complex again combining one floor of lifestyle oriented shopping throughout the plot with 10 floors of apartment units (350 units total)Expect apartment vacancy rate of 15% will come down to a steady state of 5% over the next 10 years as expat population continues to grow and demand increases for a prime locationGrowth rates are reflective of growth we’ve seen in past five years, inclusive of financial crisis of 2008Entry cap rate of 4% for both residential and retail in line with current Dubai marketExit cap rate of 5%Leverage - 25 year fully amortizing loan at 7% from foreign bankAssumed an exit in year 10
  • Return on cost is highest for mixed useOverall profit is highest for retail mall but in relation to costs is actually lower than residentialNPV is highest for mixed useIRR is highest for residentialLand residual is highest for mixed use but given the higher costs the max bid price, inclusive of the developer’s required 30% profit, is lower than residential
  • Recap of Investment Profile:Reasons for mixed uses: - long term investment focus - NOI @ Y 10 maximized - Highest 1st Year Return on Cost - Highest Land Residual - Highest NPV (Starts 1 year after Residential) - Highest Debt-Coverage RatioAll other performance metrics are competitive with residential option. The size of investment fits, the long-term investing goals are met. • Jones Lang Lasalle issued a report saying Dubai's property sector is the most popular asset class for Middle Eastern investors thanks to its improved economic outlook, stable political situation and rising rental and values. "Middle Eastern investors prefer Dubai as investment destination in the MENA region with sentiment towards the emirate improving significantly over the past 12 months," it said. "While the real estate market has lagged [behind] the overall economy, there are now increasing signs that the sector is recovering, at least for selected prime locations.“http://www.ameinfo.com/dubai-property-review-2012-investors-flock-323316-more3
  • Transcript

    • 1. G306.2 – Real Estate Investment (Abbey) TRUNK OF THE PALM JUMEIRAH // LAND USE ANALYSIS Stanford, CA – March 8th 2013 Erich Gunsenheimer, Jason Wong, JD Ridgeway 1
    • 2. G306.2 – Real Estate Investment (Abbey) Investment Committee  Company Profile: EJJ Properties » Based in Kuwait » Market cap of USD$1.5B. » Portfolio: Prime properties across MENA region  Investment Objectives » Obtain crown jewel property – Long-term investment horizon – Equity build-up – Hurdle rate of 20% 2
    • 3. G306.2 – Real Estate Investment (Abbey) Market Overview  Population approx. 2M  Average income 76,000 AED (USD$20K). High-level expats 360,000 AED (USD$98K)  No Tax  Islamic Finance 3
    • 4. G306.2 – Real Estate Investment (Abbey) Market Overview  Fall in rents after 2008 crisis  Currently world’s third strongest performer  Residential: Rents unchanged over the past 3 years » Prices to rise 5-10% per annum.  Retail: 2.9M sq.m. in 2012 » Additional 375K sq.m. by 2015 » 8.3% growth CAGR 4
    • 5. G306.2 – Real Estate Investment (Abbey) Neighborhood Assessment o Major Landmarks o Near Large Office area o Proximity of Schools and Universities o Easy access to Retail shops o Competing Residential areas Price – Apartment per Sqft 5
    • 6. G306.2 – Real Estate Investment (Abbey) Crawler Methodology  Extracts data from Dubizzle.com  2,200 ads for rent and sale on the Palm Jumeirah  Building name, Type, Size, No. of Bedrooms, and Price  Database for approximate cap rates.  Built a precise prediction model for our financial analysis 6
    • 7. G306.2 – Real Estate Investment (Abbey) Lot/Property Assessment - Key Advantages & Issues o o $102 $110 Last Pieces of Land on the Trunk o $79 Prestige of Landmark Ideal Traffic and Access Roads for Long term $90 $110 $90 $72 7
    • 8. G306.2 – Real Estate Investment (Abbey) Lot/Property Assessment - Key Advantages & Issues o o Ideal Traffic and Access Roads for Long term o Stunning view on Dubai Marina o $102 Last Pieces of Land on the Trunk o $79 Prestige of Landmark Strong price growth $110 $90 $110 $90 $72 8
    • 9. G306.2 – Real Estate Investment (Abbey) Lot/Property Assessment - Key Advantages & Issues o Expensive Location Last Pieces of Land on the Trunk o Expensive Construction o High Maintenance Costs o Ideal Traffic and Access Roads for Long term o Many residential buildings already o Stunning view on Dubai Marina o $102 o o $79 Prestige of Landmark Strong price growth $110 $90 $110 92 75 $90 68 52 $72 Marina JBR JLT Palm 9
    • 10. G306.2 – Real Estate Investment (Abbey) Construction & Use Fairmont $330m 10 floors Golden Mile $300m CC: $462/sqft 7 floors Marina $150m 17 foors Tiara $408m CC: $520/sqft 11 floors Shoreline $150m 11 floors 10
    • 11. G306.2 – Real Estate Investment (Abbey) Construction & Use Fairmont $330m 10 floors Marina $150m 17 foors Commercial/Office Golden Mile $300m CC: $462/sqft 7 floors Hard Costs: $500/sqft Soft Costs: $125/sqft Plot Size: 305,704 sqft Cost: $203 – 290m Tiara $408m CC: $520/sqft 11 floors Industrial Shoreline $150m 11 floors 11
    • 12. G306.2 – Real Estate Investment (Abbey) Multiple development options to consider for 300,000 square foot lot Residential Retail Mall Mixed Use  1, 2 and 3 bedroom apartments  Regional fashion-oriented shopping center  Residential mixed with openair lifestyle retail  Similar to other developments on Palm Jumeirah  Complementary to the Nakheel mall currently under development  Novel format for Palm Jumeirah Island as well as Dubai in general 12
    • 13. G306.2 – Real Estate Investment (Abbey) Key analysis assumptions Residential Mixed Use Retail Mall Construction Timeframe (years) 1 2 3 15% 15% / 2% 2% Rental rate (per square foot) $93 $93 / $118 $118 Rental growth 5% 5% / 5% 5% Property value growth 6% 6% / 8% 8% Entry cap rate 4% 4% / 4% 4% Exit cap rate 5% 5% / 3% 3% Demand Vacancy rate Financing LTV Interest rate 65.0% 65.0% 65.0% 7.0% 7.0% 7.0% 13
    • 14. G306.2 – Real Estate Investment (Abbey) Development options were compared along several dimensions ($ in MM) Construction cost Residential Mixed Use Retail Mall $203 $261 $290 14.5% 15.2% 12.7% $54 $63 $49 $532 $474 $631 Profit margin 261.7% 181.3% 217.2% NPV (@ 20%) $184 $198 $133 40.0% 37.3% 29.7% Debt coverage ratio 2.6x 2.7x 2.3x Land residual $184 $198 $133 Recommended land purchase price $123 $119 $46 Return on cost NOI (year 10) Profit IRR 14
    • 15. G306.2 – Real Estate Investment (Abbey) Recommendation  Initial bid of $80M with maximum negotiated price of $120M  Preferred development option is mixed use » Highest ongoing value (highest NOI in year 10) » Most value unlocked out of land  Steady draw for residents 15
    • 16. G306.2 – Real Estate Investment (Abbey) 16
    • 17. G306.2 – Real Estate Investment (Abbey) Population Growth in Dubai Average Sale Price of Property in Dubai 17

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