Question 1a (50 marks)
Urban Redevelopment Authority (URA) has launched a site in Canberra Crescent under the government land sale programme.
You have been tasked by your organisation’s Chief Investment Officer (CIO) to investigate and appraise the potential bid for the site.
To aid you in the evaluation of the project, the CIO has done some initial checks with a few consultants and the organisation’s bankers. His notes on the feedback received thus far are attached in Appendix 2.
The CIO has also asked you to provide answers to the following questions to aid him in his review of the project:
a) Based on the feedback obtained from bankers, the CIO is not confident of obtaining a favourable financing package. Accordingly, he has asked you to work on the analysis assuming there’s no bank loan financing in place. Specifically, he has asked you to compute and demonstrate the maximum bid price for the land (round up to the nearest hundred thousand dollars) to achieve an internal rate of return of at least 5.0% using discounted cash flow.
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b) The CIO took a quick glance at the Technical Conditions of the Tender and noted that there were a few mentions of relevant authorities/entities which the organisation must/may have to deal with to obtain approvals/clearances. Provide the name of the FIVE (5) authorities/entities which have been specifically mentioned in the Technical Conditions of the Tender.
c) The CIO has been quite concerned about costs inflation after gathering feedback from the consultants. He would like to understand the potential impact of this on the project return profile and has asked you to recommend the most appropriate variable to use for sensitivity analysis. Provide justification for your recommendation.
These exclude the following:
- The Urban Renewal Authority (URA)
- The Early Childhood Development Agency (ECDA)
- Not specifically named “Relevant Competent Authorities”
The CIO has also asked for a summary table with the necessary information and computed figures for his easy reference. Instructions for this are provided below.
Embed your MS Excel file into your MS Word file.
(MS Word > INSERT > Object > Create from File > Browse > Select your MS Excel file > Insert > Select “Display as an icon” > Click “OK”).
In one excel file, create:
- A worksheet and name it as “IRR” showing your IRR calculation.
- A worksheet and name it as “Cash In” showing your cash in calculation.
- A worksheet and name it as “Cash Out” showing your cash out calculation.
- A worksheet and name it as “Summary” with the following information in the table below fill in:
| Total Site Area | m2 |
|---|---|
| Maximum Site GFA | m2 |
| Estimated Residential GFA | m2 |
| Total Construction Cost | $ |
| Total Sales Commission | $ |
| Total Sale of Residential Flat | $ |
| Total Cash In | $ |
| Total Cash Out | $ |
| PV of Total Cash In @ 5% | $ |
| PV of Total Cash Out @ 5% | $ |
| a. Bid Price for Land | $ |
| b. Named Authorities / Entities for approvals / clearances |
|
| c. Choice of key variable for sensitivity analysis with justification. |
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Appendix 2
To aid you in the evaluation of the project, the CIO had done some initial checks with a few consultants and the organisation’s bankers. Below are his notes based on feedback he has received.
Estimated Construction Costs
$4700 per square meter of Gross Floor Area
This estimate includes all costs related to the construction, including site inspections, constructing the Early Childhood Development Centre, green buffer plant requirements, and other required works such as the widening of foot paths along specified roads.
Construction Period
36 months is expected for the full construction, with progress and payment schedule expected to be on a straight-line basis.
Estimated Sales Commissions
3% of Sales Price
Ratio of Saleable Area to Gross Floor Area
0.9 : 1
Residential Sale Estimates
Achievable Sales Price is projected at $1700 per square feet of saleable area, with sales velocity as follows:
- First 30%, 1 year after construction starts
- Another 40%, 2 years after construction starts
- Last 30%, when construction completes
Question 1b (20 marks)
Following further discussions with the organisation’s bankers, the CIO was glad to update that one bank has indicated its willingness to finance the project.
How will this change your analysis? Specifically, demonstrate how this will influence your review using discounted cash flow and which are the key variables which can significantly impact the analysis. Provide relevant examples to support your answer.
Question 2 (15 marks)
Demonstrate THREE (3) external factors that could impact the reliability of the NPV calculation for Q1a. Give relevant examples to support your answers.
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Question 3 (15 marks)
Demonstrate THREE (3) limitations of using IRR as the sole decision-making tool for strategic asset management in real estate investments, particularly in Singapore’s property market. Give relevant examples to support your answers.
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