This report analyzes the construction of a property portfolio using 500 million dollars invested in the Sunrise Property Fund. It evaluates the economic scenario and operations of the fund, and assesses the A-RIT index Charter Hall Residential. The report includes recommendations and a forecasted profit and loss statement.
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Running head: PROPERTY PORTFOLIO ANALYSIS Property Portfolio Analysis Name of the Student: Name of the University: Author’s Note:
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1PROPERTY PORTFOLIO ANALYSIS Executive Summary The aim for the project is to construct a property portfolio, which will be constructed using the 500 million dollars, which would be invested into the newly developed Sunrise Property Fund. The evaluation of the property portfolio will be done based on the operations of the fund and the economic scenario under which the company will be operating. The objectives and the goals of the company will be evaluated so as to analyses the future prospect of the company. The outlook and the issue faced by the find in the due course of the find were discussed. The second part of the assignment deals with the assessment of the A- RIT index Charter Hall Residential that was considered for the evaluation. The financials of the company was forecasted for the company and the valuation of the fund was done using the dividend discount model, which helped us analyze the fair market value of the company.
2PROPERTY PORTFOLIO ANALYSIS Table of Contents Part A...............................................................................................................................................3 Overview of Sunrise Property Fund............................................................................................3 Details and Justifications.............................................................................................................3 Investment Vehicle..................................................................................................................3 Strategic Objective of the Fund...............................................................................................4 Financing Structure..................................................................................................................4 Property Portfolio Construction Issues....................................................................................4 Risk Management and Compliance Issues..............................................................................5 Economic and Property Market Context for investment Decisions........................................5 Future Prospect of the Fund.....................................................................................................6 Ongoing Critical Property Portfolio Issues..............................................................................6 Overall Recommendations...........................................................................................................6 Part B...............................................................................................................................................7 Charter Hall Residential Real Estate Investment Trust...............................................................7 Forecasted Profit and Loss Statement......................................................................................7 Valuation of the Stock...........................................................................................................11 Investment Recommendations...............................................................................................12 Reference.......................................................................................................................................14
3PROPERTY PORTFOLIO ANALYSIS Part A Overview of Sunrise Property Fund The Sunrise Property Fund will be aiming at investment areas in the residential and commercial properties in Australia. The investment areas where the company will be primarily focusing is on the commercial property where the fund structure would be primarily investing into the commercial properties and leasing the same(Hoesli & MacGregor, 2014). The source of revenue for the company will be coming from the sale of commercial properties and the leasing income generated by the leasing of the commercial properties of the assets held by the fund.The 500 million fund would be used in the residential and commercial properties by the sunrise property fund. The weightage given for the residential commercial area would be the highest around 60% of the total fund would be invested in the residential properties that is 300 million dollars and 200 million dollars would be invested in the commercial property.The revenue for the company will be growing at an average growth rate of around 5% p.a.. The growth in the 500 million property fund will be significantly depending on the economic and the business factor under which the fund will be operating.The reason for selecting the commercial and residential property for the purpose of the investment is the growing Australian Property market. The favorable macro-economic conditions and the sustainability of the return generated from the property market is the key reason for selecting the specific fund style(Grimaldi et al. 2015). The key customers for the fund will be the commercial users and the high premium residential property buyers for the fund. The key focus for the company is to identify and explore the property market and alternatively identify the various sources of revenue generation for the company. The benefits for investing into the fund will be the diversification benefit the fund will
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4PROPERTY PORTFOLIO ANALYSIS be providing into the commercial and residential areas and the sustainability of the income would be insured by the income generated in the form of rent and rates collected from the leased property(Stobbs & Biernacki, 2017). Investment ObjectiveSunrise Property Fund will track a record of around 5%p.a on the average five-year investment period. Fund OverviewThe Sunrise Property Fund will be aiming at investment areas in the residential and commercial properties in Australia. Investment ManagerSunrise Investment Group APIR CodeMF000789AU Property TypeCommercial and Retail Property Investment TypeClosed Ended, Unlisted property Type StatusOpen for Investment Equity Target$500,000,000 Management Cost1.2% p.a Team Experience20 years Investment Approach: ď‚·Active Management ď‚·Risk Management ď‚·Diversification Asset Allocation LocationAllocation Sydney50% Melbourne30% Brisbane20% ď‚·
5PROPERTY PORTFOLIO ANALYSIS Details and Justifications Investment Vehicle The investment vehicle in which the Sunrise Property Fund will be investing is into the Australian Residential and Commercial Properties. The residential and the commercial properties in the Australian economy has the potential for growth and the same could be seen by the past trend growth rate of the company. The property will be focusing on the leasing services of commercial, residential property, and not directly engaging with the buying and selling of the properties(Weatherill et al. 2015).The 500 million property fund will be invested in the ratio of 60:40 ratio where the source of income generation for the company will be from capital gains and dividend income. Strategic Objective of the Fund The fund primary objective will be identification of the key areas and the type of properties demanded by the customers. The same would enable the property fund managers identify the crucial factors for the progress of the company and the growth rate of the fund. The funds business will be comparatively less risky from direct investment into commercial and residential services as the income generated will be from leased properties. The income generated will be distributed to the unit holders of the fund in proportion of the units held by them(Poon, 2017). Financing Structure The financing structure for the company will shows the amount of debt or equity exposure for the fund. The unit holders or the equity sources, which will compose of 80% of the overall capital of the company, will fulfill the fund primary requirement for the capital(Chandra, 2017). The debt exposure for the company will be done in order to get the tax benefit from the
6PROPERTY PORTFOLIO ANALYSIS income generated by the fund, which will help the company have a lower effective tax rate (Chandra, 2017).The financing structure for the company will be on the basis of 80:20 ratio that is through equity and debt sources. Property Portfolio Construction Issues The Property Portfolio will be constructed between the two key areas, which will comprise of the residential and commercial property group. Diversification is the key issue, which the fund will be facing; the fund should explore various other areas of asset class so that the sources of revenue generation for the company are diversified(Enever, Isaac & Daley 2014). The key risk analyzed in the fund pertaining to the business risk is the volatility in the leasing structure of the property revenue generated and the changing macro-economic structure of the economy. The sustainability in the level of inflation and the rising GDP of the economy may be some of the key factors, which the fund should undertake while analyzing the prospect of the fund. The exposure of the debt with the cost escalation associated with property market are some of the key business risk, which the company should evaluate(Liao et al. 2015). Financing Structure EquityDebt
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7PROPERTY PORTFOLIO ANALYSIS Risk Management and Compliance Issues The risk management of the fund will be done after the analysis of the key factors of the fund and the sensitivity factors for the fund, which influence the operations of the fund. The use of the sensitivity analysis is the key risk assessment tool, which the company should use which should incorporate the level of inflation, rent and rates structure and growth of the property market. The leasing structure designed by the fund should be such so that the same remains within the best interest of the fund in terms of changing business conditions and macroeconomic environment. Sunrise will strictly adhere to the rules and regulations of the fund and certain other regulatory and legal compliance, which the company will be following. The fund should well operate within the mentioned rules and regulations of the company such as the fund should follow the primary objective of leasing property and should not engage in buying/selling properties. The same can affect the financials of the company but in the long term sustainability will be the key issues faced by the company unit holders in the form of income generation. Legal Structure Fund Manager MF Australia Logistic MF Global Corporation OTHER OFFSHORE Investors MF Astralia Corporation
8PROPERTY PORTFOLIO ANALYSIS Economic and Property Market Context for investment Decisions The performance of the property market is highly correlated with the performance of the economy and the other macro-economic conditions. Key macro-economic factors like the level of interest rate in the economy, inflation forecast and the growth rate of GDP in the economy are some of the ley macro-economic factors, which the fund should take into consideration for deciding the future prospects of the company. Future Prospect of the Fund The futureprospect of thecompanyishighlydependenton the demandfor the commercial and revenue properties created by the customers, which will in turn derive and generate the revenue for the fund.The sustainability of the company will be seen, as the lease contract the fund will be offering for the property leased will be on a long-term contractual basis with several changes and modification in terms of maintenance cost and cost escalations clauses, which will be reviewed annually by the fund. Moderate inflation and the rising Australian economy would better incorporate the growth prospect of the economy(Smit, 2018). Ongoing Critical Property Portfolio Issues The management of assets in the form of leasing the properties and maintain the leasing structure such as continuity of the services is the key issue which the fund may face. The business risk for the fund is the only prime concern which the fund should consider and evaluate other alternative strategies for the same. Leasing Structure and the agreement by the fund in the
9PROPERTY PORTFOLIO ANALYSIS terms of the management of the properties are the critical issue, which the fund should undertake and evaluate. Overall Recommendations The fund performance is predicted to remain sustainable depending upon the business structure of the fund. The growth for the company is primarily dependent on the performance of the company and the business environment of the fund. The level of interest rate for the fund is expected to remain sustainable which will be in favor of the fund. The fund is expected to outperform the benchmark index of S&P 500 Australian REIT Index. Part B Charter Hall Residential Real Estate Investment Trust The Charter Hall Residential Real Estate Investment Trust invests in Commercial Australian Supermarkets, which are primarily located in the metro and non-metro areas. The portfolio for the fund is highly diverse with different kind of commercial properties, residential, logistic and industrial properties under the portfolio of property. The property portfolio for the fund is distributed in all over the regions of the Australia where the demand for such properties are the most. The top tenant for the fund is the Woolworths Company, which contributes the highest amount of rental income for the Company. The primary significant objective for the REIT is property investment and the company has remained the core business activity since the incorporation of the same. The REIT considers various business and macro-economic conditions of the property before the investment into portfolio of properties. The primary assessment of the property include the assessment of the environment under which the property is situated, the geographic diversification of the portfolio and the long term demographic trend growth rate of
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10PROPERTY PORTFOLIO ANALYSIS the investment to be done are some of the factors to be considered before the evaluation of the investment. The key assets of the REIT includes the range of commercial, residential and industrial property where the value of the same changes with the changes in the economic conditions and the business factors under which the property operates. Forecasted Profit and Loss Statement The profit and loss statement for the company was forecasted for the Charter Hall Residential Company by looking at the past performance of the company in the past five years. The average growth rate was analyzed for the company and the various business conditions and the macro economic conditions like the level of interest rate, inflation rate in the economy and the growth rate of the Australian GDP are some of the key factors that were analyzed in the evaluation of the income statement for the company(Hasan et al. 2016). The revenue forecast for the company primarily depends on the tenancy collected by the fund in the form of rent and rates collected and the forecast for the same depends on the increase in the total assets of the company. The key expenses for the company is the operating expenses, which the company has to spend on the maintenance of the various kind of property group the fund has under the portfolio of properties. The company has a good amount of debt financing done in the form of long-term debt financing used by the company. The interest burden for the company also stand out to be the key expenses for the company as the level of debt exposure for the company stand out high. The same increase the financial risk for the company and as the business risk for the company it is advisable for the company to reduce the level of debt so that the financial risk of the company remains low. The Company has also sources for income from different sources other than the income earned from collection of rent and tenancy(Wu et al. 2016). The average profitability for the company was evaluated by taking into consideration the past five year financials trend for the
11PROPERTY PORTFOLIO ANALYSIS company. The Earnings per share of the company was seen considerably grow at a constant growth rate of about 10% p.a. The outstanding share for the company also did not showed any major changes as the shares outstanding for the company on an average changed only about 2- 3%p.a. The balance sheet of the company was also evaluated based on the average annual growth rate provided by the company in the past five year trend analyzed.The changes in the non-current assets of the company which primarily constituted the properties did not show major changes for the company and the same grew about 5-6%p.a. annually. The annual growth rate of the receivable for the company has decreased, which shows a positive impact for the fund that they are been to realize the due amount more efficiently from the debtors of the company(Peng et al. 2017). The liabilities of the company includes the long term borrowings of the company which on an average has been increased by the company. The increase in the debt financing is expected to increase for the fund as the operations of the fund continues to grow. The common stock of the company also increased by about 1.23% on an average basis for the trend period analyzed. The same was forecasted for the company that the increase in the same will be at an average growth rate of about 1.23% p.a. CHARTER HALL RESIDENTIAL REIT BALANCE SHEET Particulars2019 (F)2020 (F)2021 (F)2022 (F)2023 (F) Assets Cash and cash equivalents6754074294817238989698885 Receivables1266812345120311172411425 Other assets28688583053818325070434602823683373 Total assets29490663140458334445835619023793683 Liabilities and stockholders' equity Short-term borrowing Long-term debt10261431132103124900413779771520268
12PROPERTY PORTFOLIO ANALYSIS Payables and accrued expenses98994105148111685118628126002 Other liabilities4370038424337852970626119 Total liabilities11688361275674139447315263101672389 Stockholders' equity Common stock22856912313824234230423711342400319 Other Equity----- Retained earnings-520880-484320-450326-418718-389329 Accumulated other comprehensive income Total stockholders' equity17648111829504189197819524162010990 Total liabilities and stockholders' equity29336473105178328645134787263683379
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13PROPERTY PORTFOLIO ANALYSIS CHARTER HALL RESIDENTIAL REIT INCOME STATEMENT Particulars2019 (F)2020 (F)2021 (F)2022 (F)2023 (F) Revenue237131248042259455271393283880 Expenses Operating expenses905949466398915103358108000 Sales, General and administrative Total expenses905949466398915103358108000 Operating income146537153379160540168035175880 Interest income200200200200200 Interest expenses-40495-44561-49035-53959-59377 Other income (expense)4274842497422474199941753 Income before income taxes148989151514153952156275158456 Net income from continuing operations148989151514153952156275158456 Net income from discontinuing ops----- Net income148989151514153952156275158456 Net income available to common shareholders148989151514153952156275158456 Earnings per share Basic0.400.440.480.530.58 Diluted0.400.440.480.530.58 Weighted average shares outstanding----- Basic414846426089437637449498461680 Diluted414846426089437637449498461680 EBITDA189071195130201383207836214496
14PROPERTY PORTFOLIO ANALYSIS Valuation of the Stock The valuation of the stock was done using the dividend discount model to determine the value of the share price of the company. The share price for the company was taken for the last five year and the required rate of return was calculated for the stock using the formula: Required Rate of Return:Risk Free Rate of Return + (Beta*(Return on Market- Risk Free Rate of Return)). The benchmark considered for the calculation of the beta of the stock with respect to the benchmark fund was the ASX 200 REIT Index. The risk free rate of return taken for the fund was the ten year government bond yield which was around 2.64% that was taken as the risk free rate of return for the analysis portion. The return from the stock was around 11.99% which was evaluated after taking the five year performance of the company(Cornell, 2016). The beta for the stock was around 0.88 times which shows that the performance of the stock was highly correlated with that of benchmark performance. The risk associated with the company was calculated using the standard deviation of the stock. The dividend discount model analysis was forecasted for the five stage period which incorporated the use of forecasted dividends and the application of the same in determining the same. The terminal cap rate is the consistent growth rate taken for the company. The terminal cap rate was calculated for the company using the formula: Terminal Cap Rate:Retention Rate* Return on Equity The terminal cap rate was calculated for determining the terminal value of the valuation. The fair market value of the share price of the REIT was generated to be around $ 5.54. However it is crucial to note that the actual trading share price of the company was around $ 4.40 which shows
15PROPERTY PORTFOLIO ANALYSIS that the actual value of the company is actually less. The derived market value of the REIT was much higher than the trading value of the company which shows that the potential of the company for better future prospects and growth is high. Forecasted Share Price of CRF Average Annual Return11.99% Standard Deviation4.17% Beta0.880357482 Risk Free Rate2.64% Return on Market7.97% Required Rate of ReturnRf+(Rm-Rf)*B Required Rate of Return10.87% Dividend Discount Model Discount Rate10.87% Terminal Cap Rate10.19% DCF Analysis through NPV Method Year20182019 (F)2020 (F)2021 (F)2022 (F)2023 (F) DPU (Cents per Share)0.360.400.440.480.530.58 Step 1: Year 2022 Terminal Value5.69 Step 2: Total Cash Flow6.050.400.440.480.53 Step 3: Market Value Per Share7.46 Investment Recommendations The future prospect of the company looks good with the growing profitability of the company and the sustainability in the operating income of the company. The forecasted revenue
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16PROPERTY PORTFOLIO ANALYSIS for the company seems to be growing and the growth trend for the same was seen increasing. The fair market value of the company was also high than the actual trading price of the stock which shows the relative undervaluation of the share price. The fund is diversified with the various kinds of commercial, residential and industrial properties which will help the REIT increase the property portfolio diversification reducing the unsystematic risk of the fund(Lane & Rosewall, 2015).
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