Property Portfolio Analysis

The aim of the assignment is to carry out a financial analysis on the Property Portfolio Analysis. The assignment covers the valuation of real estate fund and the forecasting of the same was done depending on the future economic outlook. Read more about the investment vehicle, strategic objective, risk management, economic and property market context, and more.

Running head: PROPERTY PORTFOLIO ANALYSIS
Property Portfolio Analysis
Name of the Student:
Name of the University:
Author’s Note:

1PROPERTY PORTFOLIO ANALYSIS
Part 2 Property Fund Analysis
Big Short Developers Fund

2PROPERTY PORTFOLIO ANALYSIS
Executive Summary
The aim of the assignment is to carry out a financial analysis on the Property Portfolio Analysis.
There were several parts that were evaluated while carrying on with the portfolio analysis the
factors included studying real asset as an investment vehicle, the objective and the benefits
provided by the real estate fund in the portfolio. The economic and risk factors of the property
market assessed helped us evaluate the benefits for the real asset as an asset class in the portfolio.
The assignment also covered valuation of real estate fund and the forecasting of the same was
done depending on the future economic outlook the same would provide and the benefits the
same would provide when the same is included in the property portfolio.

3PROPERTY PORTFOLIO ANALYSIS
Table of Contents
Part 2 Property Fund Analysis.........................................................................................................1
Fund Overview............................................................................................................................5
Details and Justifications.............................................................................................................5
Investment Vehicle..................................................................................................................5
Strategic Objective of Fund.....................................................................................................6
Sources and level of Funding..................................................................................................6
Property Portfolio Construction and Issues.............................................................................6
Risk Management and Compliance Issues..............................................................................7
Economic and Property Market Context for Investment Decision..........................................8
Outlook for Performance of the Property Fund.......................................................................8
Ongoing Critical Property Portfolio Management Issues........................................................8
Overall Recommendation............................................................................................................9
Part B.............................................................................................................................................10
A REIT Valuation..........................................................................................................................10
Fund Overview..........................................................................................................................11
Forecast Profits and Balance Sheet............................................................................................11
Valuation of the Stock...............................................................................................................12
Investment Recommendation....................................................................................................13
Reference.......................................................................................................................................15

4PROPERTY PORTFOLIO ANALYSIS
Appendix........................................................................................................................................17

5PROPERTY PORTFOLIO ANALYSIS
Fund Overview
The Big Short Development fund aims for capitalizing and creating investment decisions
based on the Office Retail and Office Commercial Investment Properties. The strong growth of
the Australian Commercial Properties and Retail Properties growth in the historical trend period
has shown a remarkable growth in the Real Estate Sector. The funds primary objective will be
investing in Commercial and Retail development space where the revenue from the same will be
generated based on developing property and selling the same to a third party. The development
fund will focus construction mainly on the city areas and will have a target customers like the
business community and businesspersons. The primary process for the fund would be
identification of key and crucial areas where the feasibility of the development could be well
important factors that would be considered before deciding upon the investment proposal and the
viability of the same. The fund will be established with infusion of fresh capital from the various
funding source such as debt and equity, which would contribute an amount equal to $500mn.
Details and Justifications
Investment Vehicle
The investment vehicle considered for the fund will be investments in the Real Estate
retail and commercial development project. The Retail sector and the Commercial Sector has the
potential for growth and the same can be seen from the past historical trend shown by them. The
strong macro-environment and the growing economy with moderate inflation will all give a good
positive boost to the Australian Real Estate (Morano, Tajani and Locurcio 2015).

6PROPERTY PORTFOLIO ANALYSIS
Strategic Objective of Fund
A portfolio of investment in the Australian Retail and Australian Commercial Property
will make up the strategic objective and role of the fund where the Investment will be based on a
50:50 ratio between the two-asset classes. The fund will invest in the Retail and Commercial
Space where each of the asset class suffers from additional investment, business and
macroeconomic risk. The primary objective of the fund is to invest in the well-diversified
portfolio and building development project according to the demand and the need of the
customers (Del Giudice et al. 2017).
Sources and level of Funding
The funding source for the property investment will be from debt and equity sources out
of which the both will be contributing an amount, which will be equal to 50:50 ratio. The debt
financing will be done at the current interest rate prevailing in the market and will be a long-term
source for financing the project. The equity can be borrowed from the infusion of fresh equity
capital, the same will be done by introduction of fresh equity capital, and the debt financing will
be done from additional amount borrowed from banks (Kurlat and Stroebel 2015).
Property Portfolio Construction and Issues
The property portfolio construction will be done when the investment will be done in two
of the Asset Class so that diversification is there from retail and office space. The diversification
in the two-asset class will provide diversification benefits. The demand for office space will be
dependent on the business condition of Australia and the macro-environmental factors of
Australia. The retail space of the development will be dependent on the demand of the retail
sector and the household income and the prevailing mortgage interest rate in the economy.

7PROPERTY PORTFOLIO ANALYSIS
The primary issues that would be faced by the development fund in the construction
would be the Cost Escalation, timely, regular payment of interest cost incurred, and business risk
associated with the construction of real estate projects. The issues dealt with the same should be
dependent on various business risk.
Risk Management and Compliance Issues
The risk management assessment in the development fund can be evaluated by the use of
various risk assessment tools. The risk assessment tool will help us identify the key issues and
risk associated with the development fund and the value determined at the various scenarios. The
use of sensitivity analysis and scenario analysis can be the best use of assessment of risk under
various scenarios. There are various important components involved in the assessment of the
valuation and determining the revenue generation form the portfolio. The various important
components that would be involved for valuation and determining the revenue will be the cost
escalation assumptions taken, inflation forecasts incorporated and the finance cost assumed and
taken for each of the year. There are other business risks also associated with the portfolio
investment in the real estate sector. Time decay, cost escalation and non-static tenancy structure
are the key business factor risk associated with the real estate property portfolio (Ling and
Naranjo 2015).
The property portfolio Compliance Issues may be with respect to internal and external
compliances, which the fund has to comply with the guidelines and regulations mentioned. The
legal aspects and the regulatory guidelines are some of the important aspects that the real estate
development funds need to adhere. The internal compliance comes with compliance and
guidelines mentioned by the rules and policy of the company and certain guidelines and rules

8PROPERTY PORTFOLIO ANALYSIS
placed by the creditors of the company with respect to compliance guidelines (Wainwright et al.
2015).
Economic and Property Market Context for Investment Decision
The Economic and Property Market Evaluation and analysis are some of the important
factors that needs to be evaluated for the assessment of the property portfolio. The property
market evaluation in the historical trend period has given us a brief idea that the Commercial and
the retail property growth was good when compared to other asset class. The property market
portfolio will provide an opportunity for exploring the business and financial opportunity
available for the fund investor. The macro-economic factors like inflation, GDP growth rate,
business growth rate and business cycle of the economy are some of the macro-economic factors
that should be taken into consideration while assessing the outlook of the fund. The property
market is a risky investment where the business risk associated with the real estate investment is
quite high and the beta of the fund with the overall performance of the economy is directly
linked. It means when the economy and the business function are at the boom stage the
performance for the real estate sector in the other hand will also be good (Ameyaw and Chan
2015).
Outlook for Performance of the Property Fund
The outlook for the performance of the property funds look volatile and could show a
high risk to return ratio benefits for the development fund investors. The performance outlook
for the fund looks good depending upon rising economy of Australia and the favorable economic
conditions. Moderate level of inflation in the economy and positive historical outperformance
with low level of standard deviation and volatility would favor the performance of the property
fund.

9PROPERTY PORTFOLIO ANALYSIS
Ongoing Critical Property Portfolio Management Issues
The critical property portfolio related issues, which can influence the financial viability
of the portfolio performance and the feasibility of the same is important in the long-term. The
critical property portfolio issues, which were identified, were the cost and time escalation and the
rising financing cost associated with the same.
Overall Recommendation
The financial evaluation and analysis of the property portfolio done helped us evaluate
the financial viability of the portfolio in the long term after incorporating various factors. The
business and macro-economic conditions were taken into account for assessing the financial
condition and the performance of the property portfolio in the long term. The financial analysis
and the risk assessment tool can be done by using risk assessment tools such as Scenario
Analysis and Sensitivity Analysis was performed in order to assess the value of the property
portfolio at different stages and the final value if some of the important factors incorporated
changes significantly.

10PROPERTY PORTFOLIO ANALYSIS
Part B
A REIT Valuation

11PROPERTY PORTFOLIO ANALYSIS
Fund Overview
The Australian Real Estate Investment Trust selected for the evaluation and analysis
purpose was the Rural Funds Management Trust (RFM Trust) is the oldest and the most
diversified fund in the Australian Economy. The Australian Real Estate Trust selected RFM
Trust invests primarily in the Farmland, Rural Infrastructure and Agricultural Activities. The
fund has an all-round of 21 years of record of accomplishment and the same has created a well-
diversified experience for the fund managers to identify and invest in asset classes that can yield
better returns for the fund. The Rural Fund Management is listed in the Australian Stock
Exchange (ASX) by the ticker symbol RFF. The Investment Trust Fund provides the investors of
the fund with various source of income. The Trust Fund aims to provide the source of income
through dividend payments and through Capital Growth in the form of increasing investment
value. The primary and potential source for the growth of fund is primarily dependent on the
leasing and ownership of agricultural property by the Trust.
Key Executives
The key executives for the Real Estate Investment Trust Fund were the Managing
Director of the Company David Bryant and the key executives for the company, which includes
the Business Executive, Financial Controller and the General Manager of the Trust.
Forecast Profits and Balance Sheet
The forecasted profit was made by forecasting the income statement of the Rural Fund
Management Trust Fund and there were general and other assumptions taken for forecasting the
same. The key forecasting that were done by assessing the business and the macro economic

12PROPERTY PORTFOLIO ANALYSIS
conditions of the business environment of the Trust (Shen and Tzeng 2015). The revenue
generated from the property fund and the operating income for the company is expected to
increase based on the historical trend observed by the company and due to the positive business
factors. The rise in the lease income arising from the extra land acquired and due to additional
investment in the capital expenditure observed by the Trust. The rise in the revenue was taken as
an average annual growth rate observed in the past two years, which was around 22.29%.
Depreciation and other operating expenses were taken on an average basis observed (Kecskés,
Michaely and Womack 2016). Interest Income was considered to be same as the year 2018 since
the current debt financing structure will remain the same as the year 2018 (Appendix 1). The
volatility in the other income was set off by the taking an sustained growth rate of about 10%.
The company is expected to earn a slight amount of positive cash flows from the total
comprehensive income of the assets valued when the same will be assessed at the fair value
terms. The consistent growth rate assumed for the dividend of the Trust was around 3.20%p.a,
which was taken as the terminal growth rate for the company. The payout ratio is expected to be
around 79% of the total dividend and the rest will be reinvested within the business. The
increase in the total assets of the company in the past period predominantly were due to mergers
and acquisitions observed by the company. The same trend has been forecasted to continue for
the future prospect of the company (Becher, Cohn and Juergens 2015). The growth in the total
assets of the company is forecasted to be consisted for the year 2019-2023 with the total assets
and liabilities of the company growing at average trend rate followed by the company (Appendix
2).

13PROPERTY PORTFOLIO ANALYSIS
Valuation of the Stock
The valuation of the stock was done using the Dividend Discount Model where the past
dividends and the earnings growth rate were considered for the evaluation of the correct value of
the Stock. The past dividend along with the terminal growth rate, which was taken as 10.99%
p.a. forever after the year 2023, was taken dividend discount model valuation (Rout et al. 2017).
The required rate of return assumed for the following valuation was around 11.27%, which was
close to the current required rate of return for the fund investors given the risk and standard
deviation of the asset class. The required rate of return on equity for the company was calculated
by incorporating the formula Re= Risk Free Rate + (Beta* (Return on Market- Risk Free Rate).
The benchmark considered for the evaluation of the same was the S&P/ASX 200 A-REIT where
the return of the same was considered for the trend period of five years and the beta was
calculated for the analysis of the same. (Appendix 3).
1/1/2014
4/1/2014
7/1/2014
10/1/2014
1/1/2015
4/1/2015
7/1/2015
10/1/2015
1/1/2016
4/1/2016
7/1/2016
10/1/2016
1/1/2017
4/1/2017
7/1/2017
10/1/2017
1/1/2018
4/1/2018
7/1/2018
0
0.5
1
1.5
2
2.5
3
Rural Fund Group Share Price
Investment Recommendation
The valuation for the company revealed that the intrinsic value of the share was around
1.94 per share but the actual value for the share trading currently was around 2.25. This shows

14PROPERTY PORTFOLIO ANALYSIS
that the company share price is currently highly valued and the investment recommendation
given for the same is as “sell”. The financial assessment and evaluation were some of the
important and crucial steps that needs to be done in order to assess the viability of the Rural Fund
Development. The valuation done for the following asset class was done using the dividend
discount model and the same helped us in assessing the fair value or the intrinsic value. There
were certain other parameters and factors evaluated for assessing the investment
recommendation like the average annual return for the last 5 years was taken and the average
annual return and standard deviation was calculated in order to assess the financial viability
(Appendix 4). The average annual return for the share stood out to be quite impressive with a
moderate level of Standard Deviation. The beta of the stock was quite low when the same was
considered with the benchmark index fund return, which showed that the beta of the fund was
around 0.43 times. The required rate of return from the stock was considered for the fund was
around 11.27%. The future prospect of the company looks good with the increase in the property
sales and the favorable macro-economic conditions for the firm. The reduction in the volatility
for the fund net profit is the key reason for the investment in the fund.

15PROPERTY PORTFOLIO ANALYSIS
Reference
Ameyaw, E.E. and Chan, A.P., 2015. Risk ranking and analysis in PPP water supply
infrastructure projects: an international survey of industry experts. Facilities, 33(7/8), pp.428-
453.
Becher, D.A., Cohn, J.B. and Juergens, J.L., 2015. Do stock analysts influence merger
completion? An examination of postmerger announcement recommendations. Management
Science, 61(10), pp.2430-2448.
Del Giudice, V., De Paola, P., Manganelli, B. and Forte, F., 2017. The monetary valuation of
environmental externalities through the analysis of real estate prices. Sustainability, 9(2), p.229.
Kecskés, A., Michaely, R. and Womack, K.L., 2016. Do earnings estimates add value to sell-side
analysts’ investment recommendations?. Management science, 63(6), pp.1855-1871.
Kurlat, P. and Stroebel, J., 2015. Testing for information asymmetries in real estate markets. The
Review of Financial Studies, 28(8), pp.2429-2461.
Ling, D.C. and Naranjo, A., 2015. Returns and information transmission dynamics in public and
private real estate markets. Real Estate Economics, 43(1), pp.163-208.
Morano, P., Tajani, F. and Locurcio, M., 2015. Land use, economic welfare and property values:
an analysis of the interdependencies of the real-estate market with zonal and socio-economic
variables in the municipalities of Apulia region (Italy). International Journal of Agricultural and
Environmental Information Systems (IJAEIS), 6(4), pp.16-39.

16PROPERTY PORTFOLIO ANALYSIS
Rout, A.K., Dash, P.K., Dash, R. and Bisoi, R., 2017. Forecasting financial time series using a
low complexity recurrent neural network and evolutionary learning approach. Journal of King
Saud University-Computer and Information Sciences, 29(4), pp.536-552.
Shen, K.Y. and Tzeng, G.H., 2015. A decision rule-based soft computing model for supporting
financial performance improvement of the banking industry. Soft Computing, 19(4), pp.859-874.
Wainwright, D.J., Ranasinghe, R., Callaghan, D.P., Woodroffe, C.D., Jongejan, R., Dougherty,
A.J., Rogers, K. and Cowell, P.J., 2015. Moving from deterministic towards probabilistic coastal
hazard and risk assessment: Development of a modelling framework and application to
Narrabeen Beach, New South Wales, Australia. Coastal engineering, 96, pp.92-99.

17PROPERTY PORTFOLIO ANALYSIS
Appendix
1) Forecasted Income Statement
Particulars 2017 2018 Growth (%) 2019 (F) 2020 (F) 2021 (F) 2022 (F) 2023 (F)
Revenue from Property 41573000 51087000 22.9% 62778283 77145122 94799818 116494800 143154688
Other Income 72000 1183000 10.0% 1301300 1431430 1574573 1732030 1905233
Share of net profit- equit accounted invests 1,304,000 - -
Expenses
Property Expenses 1473000 1383000 -6.1% 1298499 1219161 1144670 1074731 1009065
Other Expenses 2494000 2971000 19.1% 3539231 4216140 5022515 5983117 7127442
Management Expenses 4393000 6263000 42.6% 8929016 12729895 18148722 25874219 36888284
Finance Costs 7891000 9053000 14.7% 10386112 11915533 13670171 15683191 17992641
Total Expenses 16251000 19670000
Property Revaluation- Investment Property 17191000 7938000 -10.0% 7144200 6429780 5786802 5208122 4687310
Property Revaluation- Bearer Plants 2498000 -
Change in fair value of derivatives 5311000 1956000 -10.0% 1760400 1584360 1425924 1283332 1154998
Depreciation and Impairments 1568000 947000 10.0% 1041700 1145870 1260457 1386503 1525153
Gain on Sale of Assets 33,000 17,000 5.0% 17850 18743 19680 20664 21697
Total Other Income 26,601,000 10,858,000
Profit before tax 45167000 37,112,000 10.0% 40823200 44905520 49396072 54335679 59769247
Income Tax Expenses 1841000 1080000 10.0% 1188000 1306800 1437480 1581228 1739351
Profit after tax 43,326,000 36,032,000 10.0% 39635200 43598720 47958592 52754451 58029896
Other Comprehensive Income -9088000 7980000 10.0% 8778000 9655800 10621380 11683518 12851869.8
Total Comprehensive Income 34,238,000 44,012,000 28.5% 56576206 72727144.76 93488728.76 120177170 154484420
Earning Per Unit 16.73 17.26 3.2% 17.81 18.37 18.95 19.55 20.17
Income Statement of Rural Funds Group

18PROPERTY PORTFOLIO ANALYSIS
2) Forecasted Balance Sheet
3) Dividend Discount Model
Dividend Discount Model
Discount Rate 11.27%
Terminal Cap Rate 10.99%
DCF Analysis through NPV Method
Year 2018 2019 (F) 2020 (F) 2021 (F) 2022 (F) 2023 (F)
DPU (Cents per Share) 0.17 0.18 0.18 0.19 0.20 0.20
Step 1: Year 2022 Terminal Value 1.8355059
Step 2: Total Cash Flow 0.17 0.18 0.18 0.19 2.03
Step 3: Market Value Per Share 1.94
Particulars 2017 2018 (%) Growth 2019 (F) 2020 (F) 2021 (F) 2022 (F) 2023 (F)
Cash 3838000 1210000 10% 1331000 1464100 1610510 1771561 1948717.1
P roperty investments 527398000 658593000 5% 691522650 726098783 762403721.6 800523907.7 840550103.1
P lant and equipment 5127000 5480000 7% 5857304.467 6260586.79
Other assets 6640000 8525000 10% 9377500 10315250
Tot al asset s 543003000 673808000 24% 708088454.5 744138719 764014231.6 802295468.7 842498820.2
I nterest bearing liabilities
- Current 3204000 3361000 5% 3525693.196 3698456.56 3879685.553 4069794.989 4269220.024
- Non-c urrent 164500000 269800000 15% 310270000 356810500 410332075 471881886.3 542664169.2
Derivative fi nanc ial liabilities 3878000 5834000 10% 6417400 7059140 7765054 8541559.4 9395715.34
Current tax liabilities - 277000 277000 277000 277000 277000 277000
Deferred tax liabilities 603000 1406000 10% 1546600 1701260 1871386 2058524.6 2264377.06
Other liabilities 13140000 14395000 10% 15769864.92 17276043 18926076 20733704 22713977
Total liabilities 185325000 295073000 337806558.1 386822400 443051276.6 507562468.8 581584459
Net assets 357678000 378735000 370281896.4 357316320 320962955 294732999.9 260914361.2
Total Liabilities and Equity 543003000 673808000 0 708088454.5 744138719 764014231.6 802295468.7 842498820.2
Units on issue 254380898 255630515 255630515 0 255630515 0 255630515
NAV per unit 1.41 1.48 5% 1.553475177 1.63059806 1.711549735 1.796520289 1.88570924
fair value per unit 0.17 0.2 18% 0.235294118 0.27681661 0.325666599 0.383137175 0.450749618
Adjusted NAV per unit 1.58 1.68 6% 1.786329114 1.89938792 2.019602344 2.147425277 2.283338269
Forecasted Balance Sheet

19PROPERTY PORTFOLIO ANALYSIS
4) Forecasted Share Price and Average Annual Return and Required Rate of Return
Dividend Discount Model
Discount Rate 11.27%
Terminal Cap Rate 3.20%
DCF Analysis through NPV Method
Year 2018 2019 (F) 2020 (F) 2021 (F) 2022 (F) 2023 (F)
DPU (Cents per Share) 17.26 17.81 18.37 18.95 19.55 20.17
Step 1: Year 2022 Terminal Value 630.39835
Step 2: Total Cash Flow 17.26 17.81 18.37 18.95 649.95
Step 3: Market Value Per Share 485.81