Assignment 2 Property Development Finance 17704.pdf

Assignment 2
Property Development Finance 17704
Prepared by:
Kwik Joshua ADRIANTO
11456771

Kwik Joshua ADRIANTO - 11456771
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Table of Contents
1. Executive Summary.........................................................................................................................2
2. Introduction ....................................................................................................................................3
3. Project Overview.............................................................................................................................4
4. Methodology...................................................................................................................................6
5. Inputs ..............................................................................................................................................7
5.1 Land Acquisition Costs and Charges .............................................................................................7
5.2 Land Acquisition Finance ..............................................................................................................7
5.3 Construction Works ......................................................................................................................8
5.4 Statutory Outgoings......................................................................................................................9
5.5 Construction Loan.........................................................................................................................9
5.6 Sales and Rent Revenue..............................................................................................................10
5.7 Operating Expenses ....................................................................................................................11
5.8 Rates............................................................................................................................................12
5.9 Overdraft Facility.........................................................................................................................13
6. Financial Analysis Summary..........................................................................................................14
7. Sensitivity and Risk Analysis..........................................................................................................16
8. Scenario Analysis...........................................................................................................................20
9. Conclusion and recommendation.................................................................................................22
10. Appendices................................................................................................................................23
Appendix 1 ........................................................................................................................................23
Appendix 2 ........................................................................................................................................24

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1. Executive Summary
This report was prepared in order to make a recommendation to determine if the financial decision
of the project known as The Bay Residences would create value for the developers in term of its NPV
and IRR.
The scope and content of this report is broad and rigorous. The methodology employed to make a
well informed recommendation has been via thorough understanding and analysis of:
o DCF modelling, where the PV and IRR of the project is derived from
o Sensitivity and scenario analysis to analyse risks involves in ever changing economic
condition
This analysis showed that the IRR of the development project of 22.886% would exceed the
de elope s ta get etu dis ou t ate of 20%. NPV calculation also showed a positive figure
($376,707). Moreover, positive leverage was used here, which means that more borrowing would
lead to greater return. However, the developer would stick to 30/70 combination of equity/debt to
balance the return and risk exposure associated with taking debts.
Sensitivity and scenario analysis also showed that the project is exposed to various economic
variables. There is direct positive relationship between the return of the project with the change in
a ket g o th, a d ut egati e elatio ship et ee p oje t s etu ith dis ou t ate, i te est
rate and CPI. The project s NPV is apparently sensitive to the change in interest rate. Analysing how
those variables might affect the return, it is concluded that the project can bear moderate changes
i those a ia les hilst still eeti g the de elope s ta get etu .
Given the vast scope of factors considered, this report concludes that the current financing method
through Senior Debt with LTV ratio of % o e ea s pe iod is fa ou a le fo the de elope s
return. The interest only payment method is also suitable for this particular project.
It is recommended that the developer would re-negotiate regarding the interest rate to the lender
in o de to p ess do the fi a i g ost, a d o se ue tl a i isi g the de elope s etu .

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2. Introduction
In real estate context, decision of how to finance a selected project is proven pivotal since it will
affect the feasibility of the development project itself in the context of capital formation, and in turn,
profit, growth as well as return for the developer1
. A tailored-made financing strategy for each
individual project is really important to reflect the size and complexity of the development project as
ell as the de elope s o fi a ial i u sta es a d p efe e es.
This report aim to provide an overview of the selected financing method, which is through senior
bank debt with LTV ratio of 70%, and how that would impact the return of the investor in terms of
IRR and NPV. The method is through the analysis of Discounted Cash flow (DCF) approach, with
detailed explanation on how the figures are drawn is attached as well. Sensitivity and scenario
analysis will also be presented here to reflect the exposure of the project to the changes in various
economic variables, such as interest rates, CPI and market growth.
The limitation of this report is that most of the data is derived from secondary research, for
example: the sales price of the residential units, which is based on recent sales figures on similar
area. There are also assumptions that need to be made in order to construct the DCF model.
However, these assumptions are justified by the data gathered from common industry practice and
past data.
1
Bose, N., Mu shid, A.P. & Wu , M.A. , The G o th Effe ts of P ope t ‘ights: The ‘ole of Fi a e ,
World Development, Volume 40, Issue 9, September 2012, pp. 1784–1797

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3. Project Overview
Project Description
The s site is situated at ‐ Ne South Head ‘oad i Dou le Ba , NSW. Maximising the
a ea s pe issi le FS‘ atio, The Ba ‘eside es ould e a sto e uildi g. The pote tial highest
and best use of the site could be a mixed use project which accommodates ground floor retail suites;
and residential units on the floors above.
Retail Suites – Ground Floor
The ground floor can be developed into 4 units of retail suites, with strata schedule as follows:
STRATA SCHEDULE
Lot Number & Type Quantity Strata area (sqm)
Retail suite 1 1 70
Retail suite 2 1 82
Retail suite 3 1 98
Retail suite 4 1 111
AVERAGE 90

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Key Plan Floor Plan
Residential Units – 2nd
, 3rd
and 4th
Floor
The 2nd
, 3rd
and 4th
floor will be utilised as residential units, following the strong current demand for
one bedroom units. There will be 13 residential units, averaging 60 sqm each. Strata plan is as
follows:
STRATA SCHEDULE
Type Quantity Strata area (sqm)
Residential Suites 13 70
TOTAL 910
Key Plan Level 2 and 3 Floor Plan Level 4 Floor Plan

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4. Methodology
This report will try to analyse the impact of one selected financing method, which is through senior
bank debt, to the NPV and IRR of the development project. The methodology employed will be
through a comprehensive Discounted Cash flow Modelling (DCF method), where all relevant cash
flow (which will be further discussed in the next section of the report) are discounted back with a
hose dis ou t ate o de elope s ta get etu to efle t the p ese t alue PV of those ash
flows.
This method is deemed to be more sensitive and accurate measurement for investment point of
view because it takes into account the time value of money. The DCF model in this report was
prepared by using Microsoft Excel, assuming a target return (discount rate) of 20%.
The model also adopts compounded escalation for the rental and sales figures based on the current
market growth (2.75%). CPI was also taken into account to reflect the changes in operating costs,
such as water rates, council rates and building outgoings. Tax will not be taken into consideration in
the analysis.
This way, the NPV and IRR of the project will be derived. Internal Rate of Return (IRR) should be
highe tha the de elope s ta get etu . The othe a to dete i e this de elop e t s fi a ial
feasibility is through the understanding of Net Present Value (NPV). A project will be deemed to
create value for the developer only if the NPV is greater than 0.
Sensitivity and scenario analysis will also be used to understand the risk of the development project
in an ever changing economic condition. The analysis will try to predict the changes in IRR and NPV if
there are changes in some key important variables, such as percentage of leverage, CPI, project
interest rate, target return, and market growth.
Then, based on those findings, this report will try to recommend and devise the best financing
strategy for this particular development project.

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5. Inputs
5.1 Land Acquisition Costs and Charges
The land acquisition price is believed to be $4,750,000. This figure is based on the market value of
the land, where direct comparison approach & analysis on a rate per square meter with respect to
available market evidence and property sales of local area, where appropriate adjustments were
also made2
.
The acquisition costs will be 6% of the total land acquisition price. This 6% represent the legal and
agency fees
Land Purchase Price $ 4,750,000
Acqusition cost (6% of PP) $ 285,000
Total Purchase price
(inclusive acquisition costs) $ 5,035,000
5.2 Land Acquisition Finance
A senior loan with LTV of 70% from St George Bank will be used to finance this land purchase costs.
Having debt to finance the project means that the developer is using the power of leverage. This will
result in higher ROE on the project for the developer. The decision to use 30/70 equity/debt
combination is based on industry common practice, where the lender, in this case St George Bank,
requires the developer to contribute some specified percentage towards the land acquisition cost.
Moreover, 30/70 equity/debt combination represents the conservative risk appetite toward debt for
investment. Loan application fee of $20,000 is also being charged by the lender.
The loan adopts interest only payment with 10 years loan term and 8.45% rate per annum, with the
principal being repaid at year 10. The interest payment will stay constant throughout the whole
period of 10 years.
2
RealEstate.com.au, viewed 12 May 2013, http://www.realestate.com.au/buy/property-land-in-
double+bay%2c+nsw+2028/list-1?source=refinements

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(%) Value
Equity Contribution 30% $ 1,510,500 pa nominal
Leverage 70% $ 3,524,500 pa nominal
Loan Establishment Fee $ 20,000 pa nominal
Annual Interest Payment 8.45 $ 297,820 pa nominal
5.3 Construction Works
The construction costs have been calculated using costing outlined in the Rawlinsons Construction
Guide 2012; approximately $2,150 per sqm for retail space and $2,375 per sqm for the residential
units. This per sqm construction cost is considered quite high according to the construction
standard. This is due to the high-quality finishing that is used in a highly sought-after area like
Double Bay to reflect its exclusivity. The construction period is 2 years (start from year 1).
Professional fees are taken into account which includes: Development Management Fees, Design
and Architectural fees, Accounting and Insurance fees. Collectively, this amounts to approximately
10% of the construction costs. Demolition for the structure currently standing on the land is
approximated to cost $150,000A modest 2.5% contingency cost is also taken into consideration to
reflect the unexpected costs that will arise during the construction period.
The summary of the construction works will be presented below3
CONSTRUCTION WORKS COST
Construction works (inclusive of everything eg: pipe, electricity works, etc)
Retail $2,150 Per sqm $774,000
Residential $2,375 Per sqm $1,852,500
Total Construction Works $2,626,500
Professional fees 10.0% of the construction works $262,650
Demolition Fees $150,000
Contingencies 2.5% of the construction works $65,663
TOTAL $3,104,813
3 Rawlinsons (2010), Australian Construction Handbook, 29th Edition, Rawlhouse

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5.4 Statutory Outgoings
The project takes into account statutory outgoings, which comprise of DA Application Fees,
Advertising & Neighbour Notification costs as well as Section 94 Contributions. These costs will be
approximately $192,275, with break downs as below4
STATUTORY OUTGOINGS
DA Application Fees* $ 5,650
Advertising + Neighbour Notification $ 975
Other charges $ 150
Section 94 contribution* $ 185,500
TOTAL $ 192,275
5.5 Construction Loan
The construction will be financed through loan from Bank, with the rate of 8.45% per annum. Loan
Term is 5 years and encompasses both the construction works itself as well as the statutory
outgoings. The loan is an interest only loan and the principal ($ 3,297,088) will be repaid on year 3.
Construction Works $3,104,813
Statutory Outgoings $192,275
Total Construction Loan $3,297,088
Year Initial
Statutory
Outgoings
($)
Construction
Costs ($)
Total
Construction
Loan ($)
Accumulated
Costs ($)
Interest
Charge
($)
Construction
Loan
balance($)
1 192275 1034938 1227213 1227213 115971.6 1343184
2 1034938 1034938 2262150 213773.2 2475923
3 1034938 1034938 3297088 311574.8 3608662
Total 3297088
4
Woollahra Municipal Council 2013, Section 94 Contributions Plan 2002,viewed 13 May 2013,
http://www.woollahra.nsw.gov.au/__data/assets/pdf_file/0006/32469/S94.pdf

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5.6 Sales and Rent Revenue
Residential units will be sold straight after the construction period finishes (starting year 3). On the
other hand, retail units will be rented out first for the first 6 years upon the completion of the
construction, then, will be sold thereafter (in year 9 and 10).
Based on the market analysis conducted, it is believed that there is a buoyant market for residential
units in this Double Bay area, particularly due to the upscale image and strategic location of the area
(close proximity to the CBD). The retail market is also strong in the area with low level of vacancy in
retail sector across the Woolahra LGA.
By using direct comparison approach to the property similar within close proximity to the subject
development, it is concluded that the average per sqm sale price for residential property will be
$12,3755
and the average per sqm sale price for retail units will be $11,2506
These figures are expressed in term of present value (PV). Annual market growth rate (2.75%) will be
applied to adjust those figures respective to the year in which they are sold7
. Also, sales fee would
be deducted from the gross revenue (5.5% of gross revenue, this includes agents and legal fees).
For the rent value, it is believed that $2,075 per sqm is the market value for such retail space in the
Double Bay locality8
. There is a strong demand for retail space in the area and vacancy rate is
believed to be low (5%). 2.75% annual growth rate is also applied to rent revenue.
Please refer to Appendix 1 for the market data (recent sales analysis) of similar property in the
similar location.The summary for sales and rent pricing is as below
5
RealEstate.com.au, viewed 12 May 2013, http://www.realestate.com.au/buy/in-
double+bay%2c+nsw+2028/list-2
6
RealCommercial.com.au, viewed 12 May 2013, http://www.realcommercial.com.au/for-sale/in-
double+bay%2c+nsw+2028/list-3
7
PropertyData.com.au, viewed 16 May 2013, https://propertydata.com.au
8
RealCommercial.com.au, viewed 12 May 2013, http://www.realcommercial.com.au/for-lease/in-
double+bay+2028/list-1?nearbySuburb=false&autoSuggest=false

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RENTAL Rent price per sqm Strata area # of units Total Strata Area
Retail Space $ 2,075 90 4 360
SALES Sale price per sq metre Strata area (m2) # of units TOTAL strata area
Retail Space $11,250 90 4 360
Residential Suites $12,375 60 13 780
TOTAL 1140
5.7 Operating Expenses
Operating expenses, or what is generally known as land holding costs, is considered here. This
expense will comprise of water rate, council rate, management fees and building maintenance. CPI
of 3.5% annually will be applied to these expenses to reflect the changes in prices due to inflation.
These expenses will be calculated as a percentage of the total gross rent revenue, summarized as
below
OPERATING EXPENSES
Building Maintenance 0.75% of construction works cost
Water Rate 2.50% of rent income
Council Rate 2.15% of rent income
Building maintenance cost is going to be very low since this project once completed will be a brand
new building and generally only needs minor day to day maintenance, such as cleaning works and
periodical pest control. Building maintenance is needed to sustain the assets over time and
maximise its use. This maintenance costs payable starting from year 3, when the project is
completed. Meanwhile, water and council rate will be incurred starting from year 0.

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5.8 Rates
RATES
CPI 2.50% annual
Project Interest Rate 8.45% pa nominal
Discount Rate / Target Return 20.0% annual
Market Growth 2.75% annual
Vacancy Rate 5.0% annual
 CPI is based on the report from RBA, the outlook is to stay relatively constant, therefore
current level of 3.5% is applied here9
 Project interest rate is based on the rate from St George Bank from senior loan amounted to
approximately $4.5m10
 Discount rate is based on the target return of the developer. Strong market data and
demand for residential unit in Double Bay locality induces the developer to be confident that
they will achieve that 20% target return11
.
 Market Growth is based on the data retrieved from propertydata.com.au for Double Bay
area12
 Vacancy rate is to be assumed around 5%, reflecting the high level of occupancy and strong
retail sector in the area13
9
Reserve Bank of Australia 2013, Measures of Consumer Price Inflation, viewed 15 May 2013,
http://www.rba.gov.au/inflation/measures-cpi.html
10
St George Bank 2013, Senior Access Loan, Sydney, viewed 25 April 2013,
http://www.stgeorge.com.au/personal/home-loans/our-home-loans/specialist/seniors-access-loan
11
Australian Property Monitors, Property Research Report for Double Bay, viewed 13 May 2013,
http://www.homepriceguide.com.au/research/?locationtype=suburb&state=nsw&suburbid=14042
12
PropertyData.com.au, viewed 16 May 2013, https://propertydata.com.au
13

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5.9 Overdraft Facility
Because the project will incur negative cash flows, overdraft facility will be used to fund this as a
short term loan option. The rate is 10.15% per annum14
and it will be charged based on the negative
cumulative cash flow that incur from year 0 to 5. Total interests charges for this facility will be repaid
in year 6, as the project begins to generate positive cumulative cash flow.
Year Cumulative CF Interest charged
0 -$1,563,499 $147,751
1 -$1,998,842 $188,891
2 -$2,522,483 $238,375
3 -$4,164,474 $393,543
4 -$1,387,168 $131,087
5 -$132,331 $12,505
TOTAL $1,112,151
14
St George Bank 2013, Commercial Overdraft, Sydney, viewed
http://www.stgeorge.com.au/business/lending-finance/business-loans/commercial-overdraft

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6. Financial Analysis Summary
The timing of those cash flows when they incur will be presented in timeline below
YEAR
0 1 2 3 4 5 6 7 8 9 10
Masterplan &
Preparation CONSTRUCTION
SALES PERIOD (RESIDENTIAL)
LEASE PERIOD (RETAIL) SALES PERIOD (RETAIL)
INTEREST PAYMENT (CONSTRUCTION LOAN)
PRINCIPAL
REPAYMENT
(CONSTRUCTION
LOAN)
INTEREST PAYMENT (LAND LOAN)
PRINCIPAL
REPAYMENT
(LAND
LOAN)
For the detailed DCF Modelling spread sheet, please refer to Appendix 2
IRR and NPV analysis:
This discounted cash flow analysis above takes into account all relevant cash flow incurred (revenue
and expenses) in a specific time period of 10 years. Figures on this are established on analysis of
research data and assumptions about future market conditions affecting supply, demand, income,
expenses and potential for risk. The summary of the result is as below
Actual Target
IRR 22.886% 20%
NPV $376,707 0
The analysis for this particular property under DCF method showed that the IRR of the project is
highe tha the de elope s e ui ed etu 22.886% > 20%). The NPV examination also showed a
positive figure (> 0) which means the project will create value for the developers.

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Cumulative Cash flow analysis
The cumulative show figure above showed that project will be generating negative cash flow from
year 1 to 5. The project will break even at approximately year 5, and then it will begin accumulating
positive cash flow from the proceeds from residential units sale. It will peak at year 9. In year 10, the
project will see a decline in the cumulative cash flow because it will have to repay the land loan
principal. Overall, the project will generate healthy cash flow throughout the entire period of 10
years.
Outcome
Consequently, from the financing perspective, this financing approach, with Senior Debt LTV ratio of
% % de elope s e uit o t i utio with 10 years loan term and interest only payment is
proven viable to be used for this particular development project based on NPV IRR analysis as well as
cumulative cash flow analysis above.
($5,000,000.00)
$0.00
$5,000,000.00
$10,000,000.00
0 1 2 3 4 5 6 7 8 9 10
Project Cumulative Cash Flow

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7. Sensitivity and Risk Analysis
Although the DCF analysis above showed a positive result for the project to go forward with current
financing method, there might be uncontrollable risk that might affect the IRR and NPV calculation.
1. The risk that the developer might not be able to raise enough equity to fund the project:
impact on % leverage used. This will induce them to take more leverage beyond that
projected 70% leverage.
Leverage (%) NPV IRR
0% -$1,857,840.0 13.145%
10% -$1,538,619.0 13.872%
20% -$1,219,397.9 14.724%
30% -$900,176.9 15.736%
40% -$580,955.9 16.960%
50% -$261,734.9 18.470%
60% $57,486.2 20.381%
70% $376,707.2 22.886%
80% $695,928.2 26.339%
90% $1,015,149.2 31.503%
100% $1,334,370.3 40.618%
However, it can be seen that more leverage will lead to even higher IRR and NPV. This is
supported by the fact that the cost of debt (project loan interest rate of 8.45%) is lower than
the return of the development project of 22.886%.
Conclusion: POSITIVE LEVERAGE. Developer miht be tempted to borrow more to achieve
higher return, however, there is trade-off between risk and return. The higher the return,
the risk will be higher as well. 30/70 combination is considered ideal by industry practice.
The le e age effe t o the p oje t s etu a d NPV is palpa le as illustrated in upward
sloping graph below

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-$2,500,000.0
-$2,000,000.0
-$1,500,000.0
-$1,000,000.0
-$500,000.0
$0.0
$500,000.0
$1,000,000.0
$1,500,000.0
0.000%
5.000%
10.000%
15.000%
20.000%
25.000%
30.000%
35.000%
40.000%
45.000%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Leverage VS NPV and IRR
NPV
IRR
Also, it can be seen that if the developer can only secure less than approximately 55% of
leverage, the project would not be able to meet the target return and it would generate
negative NPV.
Looking at the steepness of the graph above, NPV and IRR is sensitive to the change in
percentage of leverage used.
2. Unpredictable supply and demand change: impact on market growth and discount rate
(target return)
Market Growth
Discount
Rate
0.75% 1.75% 2.75% 3.75% 4.75%
18.00% -$131,225.34 $265,923.50 $685,299.28 $1,128,147.40 $1,595,780.62
19.00% -$246,536.15 $129,126.91 $525,639.83 $944,162.80 $1,385,918.46
20.00% -$354,139.94 $1,496.30 $376,707.18 $772,574.37 $1,190,237.47
21.00% -$454,596.98 -$117,644.68 $237,700.33 $612,447.28 $1,007,659.23
22.00% -$548,422.58 -$228,916.99 $107,884.87 $462,925.40 $837,197.00
23.00% -$636,091.00 -$332,891.18 -$13,413.06 $323,224.00 $677,947.15

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($1,000,000.00)
($500,000.00)
$0.00
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
18.00% 19.00% 20.00% 21.00% 22.00% 23.00%
NPV
Discount Rate (Target Return)
Discount Rate & Market Growth vs NPV
0.75%
1.75%
2.75%
3.75%
4.75%
From figures above, as discount rate (target return) increases, the NPV will decrease,
showing negative relationship between those two variables. By contrast, as market growth
goes up, NPV will goes higher and higher too (positive relationship).
Sensitivity analysis above clearly showed that holding the market growth constant at current
level of 2.75%, the project will continue to generate positive NPV even if the discount rate is
raised to 22%. On the other hand, holding discount rate at current level of 20%, the project
would generate negative NPV if the market growth drops to 0.75%.
Looki g at the slope of the g aph, NPV is se siti e to the ha ge dis ou t ate de elope s
target return) as well as market growth rate.
3. Current weak Australian economic climate: impact on interest rate and CPI.
CPI
2.00% 2.50% 3.00% 3.50% 4.00%
Interest
Rate
6.45% $816,975 $811,602 $806,096 $800,452 $794,667
7.45% $599,528 $594,155 $588,648 $583,005 $577,220
8.45% $382,080 $376,707 $371,201 $365,557 $359,772
9.45% $164,632 $159,260 $153,753 $148,109 $142,325
10.45% -$52,815 -$58,188 -$63,695 -$69,338 -$75,123
11.45% -$270,263 -$275,636 -$281,142 -$286,786 -$292,571

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($400,000.00)
($200,000.00)
$0.00
$200,000.00
$400,000.00
$600,000.00
$800,000.00
$1,000,000.00
2.00% 2.50% 3.00% 3.50% 4.00%
NPV
CPI
CPI & Interest Rate VS NPV
6.45%
7.45%
8.45%
9.45%
10.45%
11.45%
From figures above, it can be seen that both interest rate and CPI has a negative relationship
with the project NPV. This means that as interest rate and CPI increase, the NPV of the
project will decrease and vice versa.
The sensitivity analysis above showed that if interest rate increases by 1% to 10.45%, the
development project will generate negative NPV. The p oje t s NPV is se siti e to the
change in interest rate.
For the CPI, even if it increases to 4.25%, p oje t s NPV will remain positive. Looking at the
shape of the chart, this development project is not sensitive to the change in CPI.
As projected by the RBA, both CPI and interest rate will stay relatively low in foreseeable
future due to the weakening of Australian economy post mining-boom15
15 Reserve Bank of Australia 2013, Economic Outlook, viewed 12 May 2013,
http://www.rba.gov.au/publications/smp/2013/feb/html/eco-outlook.html

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8. Scenario Analysis
S e a io a al sis he e ill e ased o Mi osoft E el fu tio u de What If A al sis ta . This
function enables us to analyse the possible outcome by considering possible alternative scenarios.
In this case, this report wills identify two scenarios: optimistic and Pessimistic. The hypothetical
figures for variables measured in both scenarios will be based on the past data within the last 3
years. This scenario analysis confined the past data to only 3 years back because we do t a t to
dilute the result with the extreme effect of GFC that occurred between 2007-2009.
The variables that are measured here: CPI16
and project interest rate17
, target return / discount rate
as well as market growth18
. The nature of those variables is u p edi ta le a d out of de elope s
control. CPI, project interest rate and target return will have inverse negative relationship with the
p oje t s I‘‘ a d NPV. O the othe ha d, a ket g o th has a positi e elatio ship.
Optimistic scenario:
The optimistic scenario for CPI, project interest rate and growth rate will be based on the lowest
past data within the last 3 years. For example: the lowest CPI occurred in in June 2012 with 1.2%.
This 1.2% will be the figure for the optimistic scenario. However, for market growth rate, the figure
will be based on the highest figure of past data within the last 3 years.
Pessimistic scenario:
The pessimistic scenario for CPI, project interest rate and growth rate will be based on the highest
past data within the last 3 years. For example: the highest CPI occurred in in June 2011 with 3.5%.
This 3.5% will be the figure for the pessimistic scenario. However, for market growth rate, the figure
will be based on the lowest figure of past data within the last 3 years. Although the chance of
unfavourable extreme changes in all four variables happen at once are very unlikely, the developer
should be prepared for the worst.
16
Reserve Bank of Australia 2013, Measures of Consumer Price Inflation, viewed 12 May 2013,
http://www.rba.gov.au/inflation/measures-cpi.html
17
Reserve Bank of Australia 2013, Interest Rates and Yields, viewed 12 May 2013,
http://www.rba.gov.au/statistics/tables/index.html#interest_rates
18

Page | 21
The details of the variables under those two scenarios and the summary of the result will be
represented on figure below
Scenario Summary
Current Values: Optimistic Pessimistic
Variables
CPI 2.50% 1.20% 3.50%
Project Interest Rate 8.45% 7.25% 10.70%
Discount Rate 20.0% 15.0% 25.0%
Market Growth 2.75% 4.75% -0.55%
Outcomes
NPV $376,707.18 $2,598,897.04 -$1,557,963.46
IRR 22.886% 29.9% 7.6%
Under scenario analysis summary above, it can be clearly seen that in optimistic scenario, NPV will
soar to $2,598,897.04 and generate IRR of 29.9%. O o t a , u de pessi isti s e a io, NPV ill
drop to negative figure (-$1,557,963.46) and IRR will be down below the target return (7.6%).
This analysis supports and complements the findings in the sensitivity analysis discussed in previous
part and thus, should be seen as an indicator for the developer of what might happen if there is ever
an extreme change in those respective variables.

Page | 22
9. Conclusion and recommendation
Based on the financial analysis discussed in previous section, it seemed that the financing method to
fund this development project (Senior Debt, LTV ratio of 70% over 10 years period) is favourable for
the developer. Not only that it creates value in term of positive NPV ($376,707.2) and generates
highe tha de elope ta get return (22.886%>20%), this project is also proven to be relatively safe
based on the findings in sensitivity as well as scenario analysis.
However, one thing that worth to mention is about the leverage. As this project is designed to be
heavily funded on debt (70%), therefore, this project will be sensitive to change in leverage used.
And although it is considered positive leverage, in the sense that more leverage will lead to higher
return for the developer, this would also mean that the developer will be exposed to more risk. One
of that risk would be the change in interest rate (in this case: if the rate goes up). Current
combination of 70/30 debt/equity is considered ideal based on current industry practices.
It is recommended that the developer could renegotiate with the lender again regarding the %
annual interest charged. It is possible for ABC Development Pty Ltd to ask for a more favourable
term and rates due to their good relationship on past projects. This way, the financing costs can be
p essed do a d o se ue tl , de elope s etu a e a i ised.

Page | 23
10. Appendices
Appendix 1
Recent Sales Data Property
Address
Date of sale Price Attributes Comment
6/9
Manning
Road,
Double Bay
16/02/2013 $725,000 1 Bed
1 bath
No Parking
Comparable
location
But quieter
street
721/161
New South
Head Road,
Edgecliffe
19/03/2012 $625,000 1 Bed
1 Bath
1 Garage
Modern
construction
also
2/26 Ocean
Ave,
Double Bay
8/03/2012 $610,000 1 Bed
1 Bath
No Parking
Comparable
location and
size. Older
construction
3/63
Darling
Point
Road,
Darling
Point
On the
Market
$585,000 1 Bed
1 Bath
1 Garage
Older
construction
but superior
location
9/36
Manning
Road,
Double Bay
On the
Market
$745,000 2 Bed
1 Bath
Older
Construction

Page | 24
$ per annum 0 1 2 3 4 5 6 7 8 9 10
Operating Income
Retail space 882000 956784.4 983096 1010131 1037910 1066452 1095780
Less:
Vacancy 44100 47839.22 49154.8 50506.55 51895.48 53322.61 54788.98
GROSS INCOME 0 0 0 908945.2 933941.2 959624.5 986014.2 1013130 1040991 0 0
OPERATING EXPENSE
Water rate 20948 20948 21681 22439 23225 24038 24879 25750 26651 27584 28549 29549
Council Rate 18015 18015 18645 19298 19973 20672 21396 22145 22920 23722 24552 25412
Building Maintenance 23286 25818 26721 27657 28625 29626 30663 31737 32847
NET OPERATING INCOME -80857 -83687 -86616 793479 814434 835935 857995 880630 903854 -141937
-
146905
SALES PROCEEDS
Sales Revenue
Retail suites 1012500 2585006 2656093
Residential suites 742500 1610912.477 2482819 850365.5 1747501 1795557 922467.6 947835.4 973900.9
Less
Sales costs (agents and
legal) 88600 136555 46770 96113 98756 50736 194306 199650
TOTAL SALES PROCEEDS 0 0 1925187 2967194 1016264 2088423 2145854 1102433 4308429 4426911
Appendix 2

Page | 25
$ per annum 0 1 2 3 4 5 6 7 8 9 10
FINANCING EXPENSE
Loan Establishment Fee 20000
Interest on Land
Component 297820 297820 297820 297820 297820 297820 297820 297820 297820 297820
Principal Repayment
(land)
3524500
Interest (Construction
Loan) 115971.6 213773.2 311574.8
Principal Repayment
(construction loan) 3297088
Capital Outlay (Equity) 1510500
SUBTOTAL CF (to calculate interest on
overdraft) -1611357 -999821 -1100552 -1690158 2981466 1052036 2146255 2226322 1206124 3366330 3479844
Cumulative subtotal CF -1563499
-
1998842 -2522483 -4164474 -1387168 -132331 1991058 4181193 5568183 8538605 8074580
Interest expense on overdraft (refer to
calculation details above)
1112151
BEFORE TAX CASHFLOW -1563499
-
435343 -523641 -1641991 2777307 1254837 1011237 2190135 1386989 2970423
-
464025
NPV by DF*CFs $376,707.18 accepted if it greater than 0.
NPV by formula $376,707.18
IRR by formula 22.886% accepted if it greater than cost of capital (20% in this case).

Page | 26

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