Request #1 (a)

This request is from a Smith family. Part (a) of the request requires you to investigate a particular "office" property in CBD Brisbane for a sound long-term investment. You have gathered the following information regarding the property and investment prospects:

[1] date of evaluation: 1 June 2020

[2] property's selling price/value is $1.25m

[3] the property has three units with the following information:

Unit	Area (m2)	Next market review	Passing rent (2020)
1	255	1/09/2022	$50,000
2	355	1/08/2022	$55,000
3	315	1/04/2022	$65,000

[4] Market forecasts for 2021-2022 are as follows:

	2020	2021	2022
Consumer price inflation	4.50%	0.50%	0.00%
Market vacancy level	5.50%	5.50%	7.50%
Change in market rent		-0.50%	-1.00%
Growth in operating expenses

Notes: Growth in operating expenses equals CPI + 1.5% for the corresponding year

[5] Additional information

1. Equity in 2020 will be $700,000, which will increase in subsequent years by the amount of loan repayment; rest will be loan from the bank
2. Loan interest rate will be fixed at 8.5% pa and will be on reducing loan amount/outstanding balance

The Smith family expects your advice to cover the following:

Assess and discuss the risk profile of the above property for the 2020-2022 period

In doing so, you are expected to clearly show the steps to ascertain the following:

1. 2020 net income from the property/investment and the equity cash flows
2. 2021-2022 forecasts of the net income from the property and the equity cash flows
3. to assess the risks, you are expected to use at least 5 ratios for the 2020-2022 period