Financial Reporting: Property Market, Mortgage Requirements, Investment Analysis

This document provides an overview of financial reporting in the context of property market, mortgage requirements, and investment analysis. It discusses the different types of loans available for purchasing real properties, including fixed and variable interest rate loans, fully amortizing and interest-only loans. The document also covers the calculation of NPV and IRR for investment analysis, as well as the benefits of equity financing and debt finance strategies.

FINANCIAL
REPORTING

TABLE OF CONTENTS
Part 1 - Introduction.........................................................................................................................1
Part 2- Property Market...................................................................................................................1
Part 3 - Mortgage Requirements......................................................................................................2
Part 4 – Investment Analysis...........................................................................................................3
(a).................................................................................................................................................3
(b) Calculation of NPV and IRR..................................................................................................4
(C) NPV, IRR with only equity financing...................................................................................5
(d) Debt finance strategy..............................................................................................................6
REFERENCES................................................................................................................................7

Part 1 - Introduction
Income property refers to property which is brought or is developed for earning income
by leasing, renting or by price appreciation. Income property could be commercial or residential.
Residential properties are the properties which is not occupied by owner and it carries high
interest rates as compared to owner occupied properties. Commercial properties refers to office
buildings, offices etc. Income property could be good investments alternative for number of
reasons. It gives different alternative from investing in equity stocks and bonds of companies. It
also offers investor security for real property inclusive of various diversified benefits of
investments (Levy, 2019). Investment in real state requires very wide range of considerations.
Here investment in residential apartments and commercial offices are made for earning. For
investors market of housing and interest rates prevailing in market are the main considerations.
Returns are dependent upon locations and is an significantly important for investors to carry
evaluations for the factors related to property.
Part 2- Property Market
The property market in most of the is slowing phase but than also helping companies and
people to increase their earnings through investment in properties. The trend is going upward
continuously this can also be judged by the performance and report of various companies
indulged in real estate investment properties. As per the reports of Jone Lang LaSalle it is
achieving sustainable growth in real state market. Company has clients to get certification of
more than 254 buildings that covers around 98 million sq. ft. of floor space. Company is having
offices that have more than 10000 sq. ft. of space. Company show that economy is growing
which is allowing people to invest in real property.
Company is earning annual revenue 16.3 billion through it operations over the globe
main sector of company is real state management company. Also the REIT is investment
investments are growing over substantial growth rate which shows that real estate are growing
very fast. Peoples are investing in properties for generating returns over their investment without
any risk of losing it. REIT is providing high dividend and potentials for long term as well as
moderate appreciation (Pu and Zhao, 2018). As REIT is able to provide effective dividend
income investment are being made by retirees and retirement saver who are requiring continuous
income for meeting living expenses.
1

There are many companies that are showing positive response for investment related to
real property. Market of real state is growing at stable rate but downfalls are seen rarely in this
field. People are showing their interest in this sector which is raising the share prices of the
companies. Another reason for increase in this sector as large number of people are moving
towards the urban areas that have increased the demand for real property. Therefore it is essential
for companies to establish new properties in the urban areas. Market is growing upwards in the
field of real property and it would prove to be beneficial for investors to make investment by
purchasing residential or commercial properties. Therefore the decision about purchasing
residential flats and commercial offices will attract benefits for investors.
Part 3 - Mortgage Requirements
There are different types of loan option available in market that can be availed by people
or company for purchasing the real properties. There are different loan option like unsecured
personal loans, secured personal loan, long term loans, short term loan, title loan, home equity
loan, mortgages, appliance loans , pay day loans and any more. For purchasing real property
generally long term loans, home equity loans or mortgages are taken by purchasers. Purchasing
property on loan allow users to claim expenses for the interest paid on loan in their income tax
returns. Today as market is fluctuating interest rates are also changed by the bank timely and the
borrowers have to pay interest on the changed rates(Fabozzi, Shiller and Tunaru, 2019). In long
term and mortgage loans banks give option of choosing fixed or variable interest rates.
Fixed and Variable Interest Rate loans
In fixed interest rate loan rate of interest for the entire borrowing period remains constant.
This keeps cost of borrowing to remain same over the borrowing period. Borrowers who are
taking loan for purchasing real property choose to have fixed rate loan as it allows them in
budgeting and planning their payments. Fixed rate loans have high interest rates in comparison to
variable loans.
Where variable interest rate loans are those where interest rat is changing over time.
Rates of variable rate loans increases or decreases over time therefore investors who believe that
rates of interest will decline avail variable rate loans (Salzman and Zwinkels, 2017). Interest rate
of variable interest rate loans are generally low as there is risk involved in these loans.
Fully Amortising and Interest only loan
2

Amortising refers to traditional repayment method of mortgage where constant amount is
paid over the tenure of loan. Repayments comprises of interest and principle with increase in
principle payment each time.
Interest only loan is also like interest only mortgages where principle is paid in lump sum
on expiry of loan tenure and interest is paid during the life of loan (Robertson and Rogers,
2017).
The difference in two is that in amortising loan risk of lender is reduced on each repayment
where in interest only loan risk of entire repayment is there till the payment is made.
Recommendations
Investors who are individual or making investment on short scale should go for fixed rate
interest loans as they have to plan their budgets every year. For companies it is recommended
that variable rate loans should be taken for short term and for long term investment they should
go for mortgaging. Here the investor is recommended to avail mortgage loan for commercial
offices and long term loan at fixed interest rat for purchasing residential flats.
Table 1Mortgage loan payment
Years Total payment in year Interest
Total principle and
interest paid
1 387,000 38,700 425,700
2 387,000 38,700 425,700
3 387,000 38,700 425,700
4 387,000 38,700 425,700
5 387,000 38,700 425,700
Total
payment 2,128,500
Part 4 – Investment Analysis
(a)
Table 2Profit calculation for DCF
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue 5760000 8294400 1194393
6
1719926
8
24766946
3

Less
Expenses
Operating expenses 1728000 2985984 3941499 5675758 8173092
Employee benefits 1152000 1990656 2627666 3783839 5448728
Other expenses 576000 995328 1313833 1891919 2724364
Total cost 3456000 5971968 7882998 1135151
7
16346184
Tax 691200 696729.6 1218281.
47
1754325 2526228
Profit 1612800 1625702.4 2842656.
77
4093426 5894533
(b) Calculation of NPV and IRR
Table 3Calculation of WACC
RFR 1.03%
Beta 0.50
Rm 3%
Cost of equity 2%
Loan rate 10%
Loan amount 10,935,000
Equity value of Domain holding AU 1,935,000,000
Equity weight 99.44%
Debt weight 0.56%
Interest rate 10%
Tax rate 30%
WACC 2%
Table 4Calculation of NPV
Year Cash flow PV factor PV
1 1612800 0.979978906 1580510
2 1625702 0.960358656 1561257
3 2842657 0.941131226 2675313
4 4093426 0.922288749 3775321
5 5894533 0.903823519 5327618
PV Total 14920019
Investment amount 10,935,00
4

0
NPV 3985019
Table 5Calculation of IRR
Year Cash flow
Investment -10,935,000
1 1612800
2 1625702
3 2842657
4 4093426
5 5894533
IRR 11.32%
On basis of facts it can be said that project is viable. This is assumed because NPV is positive
and IRR is in expected range.
(C) NPV, IRR with only equity financing
Table 6NPV on equity
Year Profit-Debt amount
Cost of equity
as factor PV
1 1225800 0.980 1201588.002
2 1238702 0.961 1190251.976
3 2455657 0.942 2312999.627
4 3706426 0.923 3422150.998
5 5507533 0.905 4984676.11
PV 13111666.71
Initial
investment 1,935,000
NPV 11,176,667
Table 7IRR on equity
Year Profit-Debt amount
Investment -1,935,000
1 1225800.0
2 1238702.4
3 2455656.8
4 3706425.7
5 5507533.1
IRR 87%
5

On basis of facts it can be said that project is viable. This is assumed because NPV is positive
whose value is 11,176,667and IRR value is 87% which reflect that only if project is financed
through equity then cost of capital can be reduced. Thus, debt have influence on project
profit.
(d) Debt finance strategy
Under debt financing multiple options are available to the business firms. Company can
finance its loan requirement through interest only option. Under this firm will be liable to pay
principal amount after three to five years (Amadeo, 2019). By using this option firm can prevent
itself from enduring loan burden. Within five years it can achieve good amount of profit and can
use it to pay principle amount. It can take loan at fixed or floating interest rate. It will be better to
take debt at fixed rate. This is because if interest rate moves in inverse direction then in that case
huge loss can be observed in flexible rate option.
6

REFERENCES
Books and Journals
Fabozzi, F. J., Shiller, R. J. and Tunaru, R.S., 2019. Evolution of Real Estate Derivatives and
Their Pricing.
Levy, R. M., 2019. Introduction to Real Estate Development and Finance.
Pu, C. and Zhao, J., 2018, October. Analysis of the Relationship between the Real Estate
Fluctuations and Economic Growth Fluctuations. In 8th Annual Meeting of Risk Analysis
Council of China Association for Disaster Prevention (RAC 2018). Atlantis Press.
Robertson, S. and Rogers, D., 2017. Education, real estate, immigration: Brokerage assemblages
and Asian mobilities. Journal of Ethnic and Migration Studies, 43(14). pp.2393-2407.
Salzman, D. and Zwinkels, R. C., 2017. Behavioral real estate. Journal of Real Estate Literature,
25(1). pp.77-106.
Online
Nareit. 2019.[Online]. Available through : <https://www.reit.com/investing/reit-directory?
field_rtc_segment_tid_selective[]=531&field_rtc_listing_status_tid_selective[]=524&field_addr
ess_country_selective[]=US&sort_by=field_stock_yearly_return_value>
Amadeo. K., 2019. [Online]. Available through:< https://www.thebalance.com/interest-only-
loan-types-pros-and-cons-3305936>.
(A)
7