Abacus Property Group, a diversified property group listed on the Australian Stock Exchange (ASX), have asked you
Question:
Abacus Property Group, a diversified property group listed on the Australian Stock Exchange (ASX), have asked you to evaluate an office building they would like to purchase. . You find the following information about this property:
Valuation date: Today Net letable area: 7500m2
Current Market rent rate: $ 430/m2 per annum
Annual growth rate of market rent: 4% in first three years, and 3% after that Miscellaneous income: $6,000 per annum
Vacancy and collection allowance: 4% of potential gross income Operating Expenses: 10% of potential gross income
Depreciation: $90,000 per annum
No capital adjustment, acquisition cost or selling cost is required
You have also found the information about Abacus Property Group: Loan to value ratio for this investment: 30%
Loan annual interest rate: 4%
Expected rate of return on the equity of Abacus Property Group: 12% Corporate tax rate:30%
Holding period of property asset: 3 years
You have recently appraised the comparable sold evidence listed below:
Comparable | NOI ($) | Selling price ($) | Weight based on similarity |
1 | 300,000 | 3,900,000 | 50% |
2 | 315,000 | 3,800,000 | 30% |
3 | 305,000 | 3,900,000 | 20% |
a). Value the above property using the DCF model (investment value) and if the purchase price is equal to the investment value estimated by DCF and interest-only repayment method is used, is this investment project feasible? Explain why.
Expert Answer:
