Construction Finance Analysis Report
Added on 2020-03-16
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CONSTRUCTION FINANCE: THE ANALYSISEXECUTIVE SUMMARYIt is not possible to value all projects by using a single valuation yardstick. In fact, thereare over 20 valuation methods which can be applied for this purpose and each valuationmethod will project a different value. Hence, in my opinion, it is always advisable to usethe method which is found to be most suitable for the project so as to arrive at the mostappropriate valuation. The investor promoting this project has two proposals in hand.One is for a fully commercial use development and the second is for a commercial-cum-residential project on a site in the main CBD of Melbourne. I have been given thisassignment to submit a detailed report to assess the feasibility of both the proposals,evaluate their financial viability and propose to the developer the ideal project. My suggestion should also recommend the most suitable proposal from the point ofview of Rental Income as well as from the sale angle. My findings have suggested thatthere are essentially eight key risks in a project and I suggest the developer to becautious of them when making an investment in a construction project. I also found thatalthough the Sensitivity Analysis has been more often used by analysts, researchers andscientists, in my opinion it also makes sense for the investors and business entrepreneursto make use of this evaluation, as it makes better business sense not only for buyers butalso for the investors.INTRODUCTIONIn this context, my findings have to be based on the given Gross External Floor Area(GEFA) of the site. Once I have started the evaluation, I need to focus on the calculationof the Gross Development Value (GDV) of both the proposals and I shall perform thisby using the formula, GDV = Land Value + Construction + Fees + Profit. In myfindings I have concluded that there are eight key risks of which the developers need tobe cautious when making an investment in a housing project, as per Chatterjee & Hadi,(2009). Many of the regulations contained in the government directives have describedvaluation by comparison to be the process to be used for identifying similar kind ofproperties which have been sold in the same demography. There is also the use of
listings as secondary evidence to be used, especially in the upcoming new markets andwe can also use this method for assessing the market rent. Sensitivity Analysis is now adays an essential tool in the hands of investors, especially those who are starting andmanaging new projects as these always involve uncertainty and risk. Use of sensitivityanalysis can help the investor in taking better decisions and demonstrate good returnsfrom the project, hence it makes better business sense for buyers and other stakeholders,says Du, (2012).PART – A1.Cost of DevelopmentThe cost of development of Proposal – 1 has been calculated as shown in Table – A1.This costing has been arrived at the result which is valued at the Cost Value of theproject as at 1 July 2017.2.Development PlanA development plan has been shown in Table – A2. The development plan is based onthe following assumptions – (a)The land acquisition process was initiated from 1 July 2017, when an advance of10% of the agreed cost of the land was given to the seller. A settlement period of3 months was arrived at between both the parties and hence, the buyer was not ina position to start any activity connected with the project till 30 September 2017.On the basis of this assumption, the demolition of the old structure could not bestarted before 1 October 2017, assert Kirkpatrick & Weiss (ed.), (1996).(b)The investor started the planning and designing process simultaneously with theprocess of demolition of the old structure and clearance of the acquired site. Itwas assumed that demolition and clearance of the site would be complete in 3months, hence, the designing and future planning of the development was alsostarted, so that development process could be started once the demolition wascompleted.(c)The investor started the process of Landscaping of the cleared site, once it hadthe design and plan completed. Simultaneously, the investor also started theprocess of completing the External Works, which are essentially laid out asdetailed in the Layout Plan, Design and Drawings which are prepared keeping inview the various assumptions and technical details necessary for completing the
project in the assumed time frame, financial means and profit structure assumedby the investor, as per Laporte & Le Tallec, (2003).3.Cash Flow ScheduleThe other big assumption which needs to be translated into structured planning is theCash Flow Schedule which should be prepared on Monthly Basis. This has beenillustrated in Table – A4.1 and 4.2. This assumption has also been structured with effectfrom 1 July 2017, as all financial outlay for the project has been started on theassumption that working on the project shall be deemed to have commenced from 1 July2017.4.Net IncomeTable – A4 has been compiled solely for the purpose of demonstrating how to arrive atthe Net Income once the project has been completed successfully. This is the ultimateaim of the investor and this report has taken this objective by assuming differentpossible scenarios of the project. All the scenarios are however prepared with arriving ata realistic amount which should be practical and feasible under the prevailingcircumstances and working conditions available for the completion of the project, as perSaltelli et al, (2004).5.CalculationsCalculations pertaining to the following – (a)Total Development Cost;(b)Project Finance Cost; and(c)Cost Escalation;have been illustrated in Table – A1.1 and A1.2. These calculations have been arrived atwhile keeping the assumptions in consideration and also using the best possible optionto give the investor maximum income.6.Development YieldEvery investor undertakes a project and wishes to complete it for maximum profits bykeeping expenses under control and also by keeping a consistent and constantDevelopment Yield for the project. This has been attained for this project under theviable conditions and circumstances of the project.In this case study, this is calculatedby using the following formula – Gross Rental Yield (Proposal-1) = (Annual Rental Income / Property Value) x 100.= ($28.82million / $5.54million) x 100 = 520.22%.
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