CONFIDENTIAL, APIJAN 2018/RESS11 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE INVESTMENT APPRAISAL COURSE CODE RES511 EXAMINATION JANUARY 2018 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. Answer PART A and PART B in separate answer booklet. Start each answer on a new page. 3 Do not bring any material into the examination room unless permission is given by the invigitator. 4 Please check to make sure that this examination pack consists of i) the Question Paper ii) two Answer Booklet — provided by the Faculty iii) Parry's Valuation and Conversion Table — provided by the Faculty iv) graph paper ~ provided by the Faculty 6. ‘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 (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, PARTA QUESTION 1 a) Write a short note on the following terms: i) Ground Lease ii) Ground Rent iil) Property Outgoings iv) Service Charges v) Sinking Fund APIJAN 2018/RES511 (3 marks) (3 marks) (3 marks) (3 marks) (3 marks) b) A 99-year lease building land comprises of 5-storey office building is located in a city centre. Currently, the subject property was leased to the lessee since 12 years ago at a rental of RM1.2 million (IRO) for 60 years. The current full market rental value is around RM1.75 million net. Value the registered lessor interest of subject property by using conventional investment method of valuation if the rate of return for leasehold interest is 10% per annum, sinking fund at 2.5% per annum and tax at 25% per annum. QUESTION 2 (10 marks) An investor seeks your advice regarding the best option to invest a sum of capital of RM1.8 million, He was given two (2) options, whether to invest in property investment or securities market investment. a) Option A: A freehold interest of 20-storey office building with the total gross floor area of 20,000 sq. ft. in Butterworth, Penang. The expected annual rental income and maintenance costs could be fetch are as follow: Period Expected Rental Income Expected Maintenance Costs (RM) (RM) 1 400,000.00. 25,000.00 2 100,000.00, 25,000.00 3 250,000.00 {65,000.00 4 250,000.00 65,000.00 5 500,000.00 125,000.00 6 500,000.00 125,000.00 7 750,000.00 187,500.00 8 750,000.00 187,500.00 9 4,000,000.00 250,000.00 410 1,000,000.00 250,000.00 (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL,CONFIDENTIAL 3 APIJAN 2018/RES511 Given the interest rate 8% per annum, calculate the suitability of this investment by using the Payback Method. (13 marks) b) Option B: Securities Market Investment Opening price per unit RM1.00 per unit Estimated rate of return 6.25% per annum (in average) Maturity Period 12 months Tenure 120 months Estimated Disposal Price after 10 years = RM2.00 per unit Estimate the accumulative amount and expected capital gain from the above securities market investment. (8 marks) ) Determine the best investment option for the client. (3 marks) (© Hak Cipta Universiti Teknologl MARA, CONFIDENTIALCONFIDENTIAL, 4 APIJAN 2018/RES511 PARTB QUESTION 1 A developer was offered to buy a piece of land located just outside Tanjung Bidara measuring 25 acres for RM15 million. Even though itis stil under agriculture title, it is quite obvious that it has a good potential for development. Now he is considering whether he should purchase it and re-sell after conversion is approved or carry out a development project on the land. His decision will depend on the state of the property market in the next 2 to 3 years, specifically on the market demand and supply situation; also on the general economic scenario of the country which may affect costs and profit level. ‘The first option is to convert the land to housing which may take about a year to approve. According to experts’ views converted land can be expected to sell at RM20 per square foot if the market maintains to be strong but there is also a 20% chance that the market may tum slightly down and the expected price may only be RM17 per square foot. Conversion is. expected to cost about RM2 million ‘The next option is to develop the land for residential development whereby the expected Gross Development Value (GDV) will depend on the demand for housing in the next 2 years (the total development period). Expected GDV on project completion is RM80 million, RMS50 million and RM30 million if demand is good, moderate and low respectively. The probability of having good, moderate or low demand for housing is 50%, 40% and 10% respectively. The total development cost is expected to be RM50 million but there is also a 30% chance that this may go up to RM70 million. ‘The developer also has in his option to cary out a mixed-use development on a Joint- Venture (JV) basis whereby costs fluctuation will not be a very great concern. The net profit expected from this JV is RM38 million, RM21 million, or (RM10) million if market demand is good, moderate or low respectively. The chances of good, moderate or low demand are 40%, 30% and 30% respectively. Development is expected to take 30 months to complete. The developer requires a rate of return at 8% per annum. a) Develop a decision tree to help the developer make a decision. (10 marks) b) Construct the table of pay-off matrix for the problem. (10 marks) c) Using a holistic approach, identity the best option for the developer to take. (6 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL,CONFIDENTIAL 5 APIJAN 2018/RESS11 QUESTION 2 Gemilang Investments Sdn. Bhd. manages funds for a number of multi-national corporations. The investments strategy is tailored to each client's requirements. For a new client, Gemilang Investments Sdn. Bhd. has been authorized to invest up to RM1.5 million in two major investment funds; a money market fund and Real Estate Investment Trusts (REITs) fund, Each unit of the money market fund costs RM60 and provides an annual rate of return of 10%. Each unit of the REITs fund costs RM100 and provides an annual rate of return of 5%. The client attempts to minimize risk subject to the requirement that the annual income from the investment be at least RM80,000. According to Gemilang Investments Sdn. Bhd. risk measurement system, each unit invested in the money market fund has a risk index of 8, and each unit invested in REITs fund has a risk index of 4. The higher risk index associated with the money market fund simply indicates that it is the riskier investment. Gemilang Investments Sdn. Bhd. client has also specified that at least RM400,000 be invested in REITs fund. a) State the decision variables of the investment problem. (2 marks) b) Formulate the objective function (2 marks) ©) Formulate the constraint equations. (6 marks) 4) Using the graphical solution, determine how many units of each fund Gemilang Investments Sdn. Bhd. should purchase for the client to minimize the total risk index for the portfolio. (8 marks) €) Calculate how much annual income the investment strategy in (d) would generate. (3 marks) f) Suppose Gemilang Investments Sdn. Bhd. desires to maximize annual return. How should the funds be invested? (4 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL