CONFIDENTIAL AP/DEC 2019/RES511

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE INVESTMENT APPRAISAL

COURSE CODE RES511

EXAMINATION DECEMBER 2019

TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of two (2) parts PART A (2 Questions)

PART B (2 Questions)

2. Answer ALL questions in the separate Answer Booklets. Start each answeron a new page.
3. Do not bring any material into the examination room unless permission is given by the
invigilator.

4. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) two Answer Booklets - provided by the Faculty

5. Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 5 printed pages
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CONFIDENTIAL AP/DEC 2019/RES511

PART A

QUESTION 1

a) Write a short note on the following terms:

i) Initial Yield
ii) All Risk Yields
iii) Conventional Cash Flow
iv) Ground Rent
v) Inflation Rate
(10 marks)

b) Value a freehold interest of a 5-storey commercial building located in a city centre. The
property was recently leased for a term of 10 years at an initial rental of RM450,000.00
per annum (net) but subject to rent review every 5 years. The market rental value is
RM600,000.00 per annum (net) and the All Risks Yield is 7% per annum. Value the
interest by using conventional investment method of valuation.

(15 marks)

QUESTION 2

Given the following cash flow :

Year Capital Rental Income Outgoings

(RM) (RM) (gross) (RM)
0 (7,000,000.00)
1 250,000.00 62,500.00
2 400,000.00 100,000.00
3 550,000.00 137,500.00
4 (200,000.00) 625,000.00 156,250.00
5 750,000.00 187,500.00

Based on the above financial projection, you are required to determine:

a) The freehold interest by using the Payback Method, if the capitalisation rate is 8.5% per
annum and the market rental income is RM 800,000.00 per annum (net).
(10 marks)

b) The profitability and viability of property investment by using the Discounted Cash Flow
(DCF) method with the following approaches:

i) Net Present Value (NPV) Approach,

(7 marks)

ii) Internal Rate of Return (IRR) Approach.

(8 marks)

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 CONFIDENTIAL 3 AP/DEC 2019/RES511

PARTB

QUESTION 1

The Sepadu Real Estate Company is planning into a comprehensive mixed use property
investment on a time span of 7 years. The properties are located in the centre of a large city.
It must decide on the investment sequence between different types of properties so that
profits from the investment can be maximised. The company can invest into a
comprehensive mixed use property in the beginning. Alternatively, it can invest in
commercial or residential properties first and thereafter invest into other property types. The
exact mix of property uses that will yield the highest profit is uncertain because the profits
from the different mixed uses would depend on the strength of demand which is uncertain.

Property experts have been consulted regarding their forecasts of strength of demand in the
economy. When asked for the likelihood of each condition, the experts forecasted a 35
percent chance for high demand, a 50 percent chance for medium demand and a 15 percent
chance for low demand.

In the following investment strategies, all future costs and incomes have been adjusted to
their present worth.

If a comprehensive mixed use property is invested first and demand is high, the Net Present
Value (NPV) is estimated to be RM 200 million. If demand is medium, however, the NPV of
the investment will fall to RM 120 million. If demand is low, the NPV will be a loss of RM 40
million.

An investment in commercial properties will generate an NPV of RM 140 million if demand is

high or medium and a loss of RM 25 million if demand is low. If demand is high, residential
properties can be added to the investment at a cost of RM 60 million to generate an
additional RM 100 million in incomes.

An investment in residential properties would limit its NPV to RM 80 million regardless of

demand. If demand is medium, an additional investment in commercial properties can be
included at a cost of RM 40 million. Its NPV would then be RM 130 million less the cost of
RM 40 million for the investment in commercial properties. If demand is high, both
investments into commercial and leisure properties can be added at a cost of RM 100
million. Its NPV would then be RM 190 million less the cost of RM 100 million for the
investment in the commercial and leisure properties. Alternatively, if demand is high, an
investment in commercial properties could be added to increase its NPV to RM 160 million
less the cost of RM 60 million for the investment in the commercial properties.

As a property investment manager to Sepadu Real Estate Company, use the decision
analysis technique to advise the company.

a) Draw the decision tree for the company's problem.

(10 marks)

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CONFIDENTIAL AP/DEC 2019/RES511

b) If the company has an optimistic view, which investment strategy should be selected?

(2 marks)

c) If the company adopts a "play safe" approach, which investment strategy should be
selected?
(2 marks)

d) If the company adopts a holistic approach taking into account of the risk factor, provide
advice to the company on which investment strategy he should select.

(5 marks)

e) Comment on the advantages and disadvantages of using decision tree to assist

investors in making property investment decisions.
(6 marks)

QUESTION 2

Excellent Property Investment Berhad is planning to develop mixed commercial schemes in

Manjung Point, Lumut, Perak. The land has been identified and the feasibility study has
been carried out by the real estate consultant engaged by the developer. The land also has
been approved by Majlis Perbandaran Manjung to be developed.

In order to stay competitive, the developer is trying to establish most effective practice to be
implemented in the project. They are seek your advice and giving the details of the pre-
development stages activities and the estimated duration of each activity as well as
immediate preceding activity as follows:

ACTIVITY DESCRIPTION OF ACTIVITIES DURATION IMMEDIATE

(WEEKS) PRECEEDING
ACTIVITY
A Develop final working plans 4 -

B Develop specifications 2 A
C Develop Cost Analysis 2 A
D Develop detailed construction budget 3 A
E Develop site and landscape plans 3 B
F Building contract tender 5 C
G Secure and signed contract from 2 E
contractor
H Secure construction financing 3 B, F
I Secure permanent financing 3 G, H
J Determine exterior and trim surfaces 4 C
and building materials
K Secure local government approval 6 D
L Secure work permits 5 I, J, K

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Based on the above activities, you are required to prepare the followings:

a) The critical path model to represent the logical sequence of the activities.
(10 marks)

b) The float table, showing the critical and non-critical activities and the available floats.

(12 marks)

c) An estimation of the total time taken for the whole activities, if activity J is extended to 6
weeks.
(3 marks)

END OF QUESTION PAPER

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