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Risk of doing professional favour

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 Real Property investment analysis (LaSu3082)
Abay A
WGCF&NR, HU
WONDOGENET,
Ethiopia
FEB, 2020

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• Course title: real property investment analysis
• course No: (LaSu-3082)
• Credit hours: 7 ECTS
1.1 course Outcomes:
By the end the course students will be able to:
• Understand basic concepts of property investment theory and
analysis;
• Analyze the strengths and weaknesses of the various property
investment decision criteria;
• Distinguish the different types of cash flows;
• Apply capital budgeting techniques to analyze the profitability
of property investment decisions; and
• Identify and Understand real estate development processes.

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UNIT. 1 NATURE OF REAL PROPERTY INVESTEMENT
• Types of investment
• Idea of real estate investment
• Characteristics of real property investment
UNIT 2.THE TIME VALUE OF MONEY
• Compound or future value
• Present value
• Compounding or future value of annuity
• Present value of annuity
• Accumulation of future sum (sink fund)
• Deterring yield (rate of return)
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UNIT 3.ESTIMATING AND PROJECTING CASH FLOW
• Types of cash flow
• Estimating net operating income based on market condition
• Estimating net operating income based on lease/contract
condition
• Projecting cash flow
UNIT 4. REAL ESTATE INVESTMENT DECISION CRITERION
• Motivation for investing
• Measure of investment performance using rations: profitability
ratio, multipliers and financial risk ratios
• Measure of investment performance using cash flow projection:
The Net Present Value (NPV), Internal Rate of Return (IRR), NPV
Vs IRR, Modified Adjusted IRR
• Taxation of income producing real property

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• UNIT 5. RISK DETERMINATION, MEASUREMENT AND ANALYSIS
• Type of risk and importance of risk analysis
• Accounting for risk
• Variance as a risk measure
• Modern risk analysis
• Decision trees, sensitivity analysis and scenario analysis
UNIT 6.OVERVIEW OF THE REAL PROPERTY DEVELOPMENT
PROCESSES
• Definition and nature of real estate development
• Economic Perspective
• Relevancy of Universal Knowledge
• Ground-Up Development versus Redevelopment
• The Process

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• Business ethics
• Relevancy to the Real Estate Industry
• Legislated Ethics
• Project and development teams
• types of Developers
• Functional Disciplines in the Development Process
• Factors to Consider When Forming a Development Team
• International practice
• Globalization of property development
• Opportunities
• Barriers and limitations
• Risks in international property development
• Developing an international strategy
• Examples of international property development
• UNIT 7. REAL ESTATE INVESTEMENT ANALYSIS IN ETHIOPIA
• Development planning and project analysis practice

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 1.3 Didactic Methods:
• Interactive lecture,
• Group work and presentation

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 Mode of Assessment:
• Quiz (I & II): (20%)
• Group Assignments: (10%)
• Individual: (10%)
• Presentation: (10%)
• Final Exam: (50%)

03/07/2022
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1.6 Module Policy

• Attendance is mandatory
• Expectation for Classroom Behavior
• Contribute in class discussion
• Meet assignment deadlines
• Courtesy and respect
• Discipline
• Punctuality
• Cell phones must be switched off
• Late submission is not acceptable
• Plagiarism
• will disqualify your assignments
• Missing Exam and Tests (medical case & emergency only)
• Need to be supplemented by relevant documents
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 Chapter one
Nature of investment

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 Definition
• Investment is an asset or item with the goal of generating
income or appreciation.
• Investing is putting money to staring and expanding the
project.
• In economic sense investment is purchasing of goods that are
not consumed today but used in the future to create wealth.

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 CONT…

• Investment is any vehicle in to which founds

can be placed with expectation that it will
generate positive impact and that is value will
be preserved or increased.
• Return: the reward for owning an investment
• Current income
• Increased in value

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• We often speak of some sacrifice that we make as an
"investment in the future."
• For instance Parents give up their time and resources now
so that their children may go to college later.

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• Any decision that involves significant costs now
for the sake of future benefits is called investment
decision.
• Investment is costing today for future benefits
• The two basic elements of investment decision:
– the initial costs and
– the value of the future benefits.

• Making good investment decisions is important

because, by their nature, they cannot be done
easily or without cost.

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 Types of investment
• Investment can be classified on the base of
– mode,
– Nature ,
– Risk,
– Time and
– Extent .

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 CONT…

1. Investment can be
I. monetary – end benefit determine by money

II. non monetary – thin result is determine by

satisfaction instead of money

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 Con….
2. Security or property
A. Securities: bonds, stocks, options
B. Real property: land and building
C. Tangible personal property: gold artwork antiques
D. Intangible property : patent right
3. Direct and indirect investment
a) Direct investment :investor directly acquired claim
b) Indirect investment : investor is on part of the
portfolio.

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 Con….

4. Debit, equity and derivative security

• Debit: investor fund in exchange for interest
income and repayment of loan in future(bonds)
• Equity: respondent on going ownership in a
business or property (common stocks)
• Derivative security: neither debit nor equity,
drive value underline asset(option).
5. Low risk and high risk
• Risk chance that an actual investment return
will differ from those expected.
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 Con….

6. Short term and long term

– Short term mature with one year
– Long term maturities longer than a year
7. Domestic and foreign
– Domestic is national based company.
– Foreign oversea based company

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 Key participant in investment

1. Government
• Federal state and local investment operation

• Typically net demander of fund

2. Business
• Investment in production of good and service
• Typically net demander of funds
3. Individual
• Some needs for loan (house or auto)
• Typically net supplier of fund.
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 Steps in investing
Step 1: meeting investment prerequisites
a. Make certain necessities of life are provide for
b. Adequate protection against losses from death, illness
and disability
Step 2: establishing investment goals
c.Example include:
d. accumulating retirement funds
e. enhancing current income
f. Saving for major expenditures
g. Sheltering income from taxes

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Step 3: adopting investment plan
• Develop an written investment plan
• Specify target data and risk tolerance for each goal
Step 4: evaluating investment vehicle
• Assess potential return and risk
Step 5: selecting suitable investment
 Research and gather information on specific investment
 Make investment selections
Step 6: constricting a diversified portfolio
 Use portfolio comprised with different investments
Step 7 managing the portfolio
• Compare actual behavior with expected performance
• Take correct action when needed

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 Real Estate Investment
• The world of real estate is rich with investment decisions,
but not all of these truly concern real estate.
• True real estate decisions are about
– acquiring,
– financing,
– using,
– improving, and
– disposing of actual real estate assets (land and its
permanent structures).
• In contrast to these decisions are management or
operational choices that coincidentally arise from
involvement with real estate.
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• For example, a residential real estate brokerage
company must make a host of decisions about
• operating the business-personnel enrollment
• equipment decisions,
• compensation,
• marketing methods and strategies and
• organizational decisions.
• But these decisions are not really about real
estate. Rather, they are the kind of decisions that
any organization must make to reach its goals, and
are not our concern here.

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Characteristics of real property investment

• Products are homogenous

• Long term investment
• durable (long lasting)
• costly
• Low transaction

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 Chapter two
Time value of money

• The concept of time value of money

• A Birr today is more valuable than a Birr a year
after.
• Because :-
capital can be employed productively to generate return
Individuals, in general, prefer current consumption to
future consumption
In an inflationary period of a Birr today represents greater
real purchasing power than a Birr a year after.

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 Cont
Compound or Future value
• Compounding means the process of finding the
future value of a present amount of money or birr.
• any compounding problem has four basic
components:
An initial deposit, or present value of an investment of
money.
An interest rate.
Time.
Value at some specified future period.
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 Cont
• To find the future value , we must introduce
some terminology:
– PV = present value, or principal at the beginning of
the year
– i = the interest rate
– I = Birr amount of interest earned during the year
– FV = principal at the end of n years, or future value
– n = number of years

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 Cont

• The formula to determine future value is

FV = PV(1 + i) = pv + pv*I

Example:
If you make a bank deposit of 10,000 Birr that is compounded at an
annual interest rate of 6 percent, what will be the value of the
deposit at the end of one year?
– Future value at the end of one year (n = 1 year) is determined as
FV = PV + II
Birr 10,000 + Birr 600
Birr 10,600
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 Future Value Multiple Periods
• It should be pointed out that the value at the end of year 2 could
have been determined directly from PV as follows:

FV = PV(l + i)(l + i)
PV(l + i)2

• It should be pointed out that the value at the end of year 2 could
have been determined directly from PV as follows:

FV = PV(l + i)(l + i)
PV(l + i)2
FV = PV(1 + i)2

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 Birr 10,600(.06) = I2
Birr 636 = I2

• And value at the end of two years, or n=2 years, in now

Birr 10,600 + I2 =FV

Birr 10,600 + Birr 636 = Birr 11,236
• In our problem, then, when n=2 years
FV = PV(1 + i)2
Birr 10,000(1 + .06)2
Birr 10,000(1.123600)
Birr 11,236
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 Cont
• General formula to calculate FV for n years

FV=PV (1+i) n

• Suppose an investor deposits 1,000 Birr today in an interest

bearing account at a local bank. The account pays 5 percent
interest compounded annually. What will be it worth after 5 years?

FV = PV(1 + i)5
Birr 1000(1 + .05)5
Birr 1000(1.276282)
Birr 1,276.28

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 Compounding for Periods of Less than One Year

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 Present Value

• we must When determining how much should be paid today for an

investment that is expected to produce income in the future apply an
adjustment called discounting
• General formula for PV is

PV = FV *1 /(1 + i)n

• example:
• the future value to be received at the end of one year, n = 1 year, is
known to be Birr10,600. Because the interest rate (i) is also known to
be 6 percent, PV is the only value that is not known. PV, the present
value or amount we should pay for the investment today, can be
easily determined by rearranging terms in the above compounding
formula as follows:
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 Cont
PV = FV *1 /(1 + i)n
fv= Birr 10,600
= Birr 10,600
= Birr 10,600 X (.943396)
= Birr 10,000
• Activity
Assume you want to build up a lump sum of 50,000
Birr in twenty years’ time and interest rate remains
constant at 5 percent per annum. How much it would
cost today to buy this investment?
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 Compound or Future Value of an Annuity
• Equal payments (P), or deposits, made at equal
time intervals. This series of deposits or payments
is defined as an annuity.
Calculating Future Value of an Annuity
• To compute the sum of all deposits made in each
succeeding year and include compound interest
on deposits only when it is earned, the general
formula for compounded interest must be
expanded as follows:

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 Cont

FVA = P(1+i)n- 1+ P (1+i)n-2 +...+ P

• This may also be written as

FVA = future value of annuity

• Where
– P = payment
– n= time
– i= interest rate
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 Cont

• In this expression, FVA is the future value of an annuity or the sum

of all deposits, P, compounded at an annual rate, i, for n years.
• each deposit is assumed to be at the end of each year and is
compounded through year n.
• The final deposit does not earn interest because it occurs at the
end of the final year.
• Since we are dealing in our example with a series of 1,000 Birr
deposits made over a five-year period, the first 1,000 Birr deposit
is compounded for four periods (n - 1), the Birr1,000 deposit made
at the beginning of the second year is compounded for three
periods (n - 2), and so on, until the last deposit, P, is reached.
• The last deposit is not compounded because it is deposited at the
end of the fifth year.
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 Cont

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 Cont

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 Cont

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 Present Value of an Annuity

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 example

• Assume the investor receive 500 birr at the end of

each year for five year time period. The interest
rat is 6 percent. Compute how much the investor
invest now generate the above income. Or
compute present value of annuity.

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 Cont

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Present Value of Annuities discounted Less
than a year
annually

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