Property Risk Management: Investment Analysis Report, Finance Module

This report provides a comprehensive analysis of property risk management and investment for a commercial property located in Sydney. The analysis begins with an introduction to the property, Multiple Levels, situated in the Sydney CBD. It then delves into key details and facts used for valuation, including location, property type, floor area, lease terms, and tenant information. The investment analysis section utilizes discounted cash flow (DCF) techniques, including Net Present Value (NPV) and Internal Rate of Return (IRR), to assess the project's financial viability. The report also examines the impact of leverage, risk, and taxation on the investment, considering various scenarios and sensitivity analyses. Finally, the report concludes with recommendations based on the financial analysis and risk assessment, highlighting the potential of the property as a sound investment opportunity.

Running head: PROPERTY RISK MANAGEMENT
Property Risk Management
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Introduction......................................................................................................................................2
Discussion and Analysis..................................................................................................................3
Key Details and Facts used for Valuation of Multiple 65 Property............................................3
Investment Analysis.....................................................................................................................4
Impact of Leverage, Risk and Taxation.......................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
The application of property risk management has been well done for an income
producing property that is located in Sydney and would be well analysed based on Investment
Analysis factors and considerations. The income producing property Multiple Levels is
prominently located into the corner of York Street and Barrack Street, which is well located in
the heart city of Sydney CBD’s Western Corridor and is just around 150m walk from the Martin
Place. The assessment or analysis of the project will be well carried on with the help of key
investment techniques that would be well used in the project like NPV and IRR. The project
would also be viewed with respect to effect that would be seen in the particular project due to
leverage, taxation and other risk factors which can affect or alter the investment analysis
undertaken. The 65 York Street presents a unique set of compelling combination of character,
with convenience and cash flows that is well required from an investment property (Multiple
Levels, 65 York Street, Sydney NSW 2000 - Office For Sale | Commercial Real Estate 2020O.
This gives a rare and a unique opportunity for well securing a significant stake in the Sydney’s
CBD Western Corridor Office Market. The subject of the property that would be well considered
for leasing and analysis purpose would be in the form of lots that would be including Level 8,
Level 11 and also a part of Level 3. The three property would be given on a ten year net lease by
the operator with an annual fixed increase in the lease of the property offered. The lease will be
well offered till a period of 2030 and the total square feet of all the three levels would be around
1,646 square meter. Level 8 of the Building will be around 650square meter, Level 11 will be
around 650 square feet and Level 3 part would be 346 square feet (Sold Office at Level 3, 65
York Street, Sydney, NSW 2000 - realcommercial 2020). The purchase price of the property

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would be around $2,000,000 and the resale price of the property has been well calculated with
the help of revisionary value and resale rate for the property.
Discussion and Analysis
Key Details and Facts used for Valuation of Multiple 65 Property
The key details and information about the Multiple 65 Property are as follows:
 Location: York Street, Sydney, NSW 2000.
 Type of Property: Commercial/Office Property
 Total Floor Area: 1,646 square meter
 Lease Term: 10 Years
 Initial Investment: $2,500,000
 No of Tenants: 3 Tenants
 Name of Tenants: Info-Craft Digital Services (Tenant of Level 8), ABC Logitech Service
(Tenant of Level 11), and Zeus Private Ltd (Tenant of Level 3).
 Reversionary Yield: 12% Anticipated Yield/Initial Yield.
 Resale Price Yield: 2%
 The total Capital Outlay including the Stamp Duty, Transfer Fees and Legal fees would
be around $2,624,190 (11/65 York Street, SYDNEY, NSW 2000 - Real estate for rent -
homesales.com.au 2020).
 The current rate of the gross area offered is around $369.10.
 The Annual growth rate of Rental Yield considered is around 3%.
 CPI Inflation Rate has been considered at the level of 2%.
 A flat Charges of about $1000 would be charged as legal fees.

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Investment Analysis
The investment analysis has been well considered for the portfolio constructed with the
help of the cash flows statement that has been well drawn for the Property that would be drawn
for the sum of ten years (65 York Street, Sydney, NSW 2000 - Office For Lease -
realcommercial 2020). The initial sum of investment that would be done in the form of
purchasing of the property would be done for the Multiple Level Property would be around
$2.624 Million and the breakup of the same would be as follows:
Capital outlays Amount ($)
Capital $2,500,000.00
Stamp duty $122,990.00
Transfer fee $200.00
Legal fee $1,000.00
Total capital Outlays $2,624,190.00
The key set of property base that would be put on a lease basis will be the Level 3, Level 8 and
Level 11 of the Multiple Level Property that we will be purchasing for the purpose of letting the
same to various tenants in the form of Lease Agreement which would be kept for sum of ten
years. In the tenured time frame of ten years the lease is expected to well increase by around 3%.
The list of tenants that would taking over the property is well discussed below and the gross rate
on a per square feet for the property would be around $369.10 (Unique Serviced Offices on York
Street 2020).
Property
Brief
Tenants Area
s
Current Rate/m2
(Gross)
Remaining Term in First 5
Years (5+5)
Level 3 Zeus Private Ltd 346 $ 369.10 5
Level 8 Info-Craft Digital Services 700 $ 369.10 5
Level 11 ABC Logitech Services 600 $ 369.10 5

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Tenancy Schedule: It is well assumed that the lease term for the property would be remaining
intact for a period of 10 years in which the tenants that would be involved in the lock in period
where they would not be allowed to exit the contract before the period of ten years.
Outgoing Schedule: Operating Expenses for the property would be in terms of key expenses
that the company would be incurring. These key set of expenses for the company would be in the
form of Management Fees which would be around 5% of the Effective Gross Income that the
property would be generating. Property tax would be charged at flat $35,000 and is well
expected to increase by around 2% which is the CPI Index data or the inflation movement data
considered. Other expenses like Insurance, Utilities and Repairs would be the key set of output
expenses that the company would be incurring.
Discount Rate: The discount rate well says about the required rate of return that the capital
providers are well requiring from the capital investment that would be done by each of the
capital providers. It is well estimated that the discount rates for each of the various scenarios of
changing leverage and equity base could be well materialized with the help of given set of
numbers shown:
Discount Rates
100% Equity Finance Leverage 60-40
Cost of Equity 10% Cost of Equity 10%
Cost of Debt 4% Cost of Debt 4%
Weight of Equity 100% Weight of Equity 40%
Weight of Debt 0% Weight of Debt 60%
WACC 10.0% WACC 6.4%
Leverage 50-50 Leverage 40-60
Cost of Equity 10% Cost of Equity 10%
Cost of Debt 4% Cost of Debt 4%
Weight of Equity 50% Weight of Equity 60%

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Weight of Debt 50% Weight of Debt 40%
WACC 7.0% WACC 7.6%
Leverage 55-45
Cost of Equity 10%
Cost of Debt 4%
Weight of Equity 45%
Weight of Debt 55%
WACC 6.7%
Net Cash Flows: The net cash flows that the project would be generating in the base given
100% equity finance would be well calculated by taking the various rental income that would be
collected from the tenants of the property. After deducting all the operating expenses and costs
that the company would be incurring the net cash flows for the project has been determined for
each of the period where cash flows has been analysed. The net cash flows generated from the
project has been positive and the same would be well helping in well covering down the initial
sum of cost incurred.
Capital Budgeting Techniques: The key capital budgeting techniques that would be well
deployed for the purpose of analysing the project has been Net Present Value and Internal Rate
of Return. The NPV for the project in the base case was calculated to be around $3.142 Million
and IRR to be around 24.99%.
Impact of Leverage, Risk and Taxation
The impact of leverage has been well captured by taking the various levels of debt which
can affect the project investment accordingly discount rates were changes in order to assess the
viability of the project. Implication of statutory tax rate has been well applied with the help of
28% taxation rate charged to the net cash flows earned. Implication of Risk Analysis on the other

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hand has been well carried out with the help of the scenario analysis in which optimistic
scenario, pessimistic as well as most likely case has been considered. In the case of optimistic
scenario the growth in the NOI has been considered at 5% optimal rate (Tham and Vélez-Pareja
2019). On the other hand in the Pessimistic Case the growth has been considered at -5% rate. It is
important to note that the scenarios and factors considered said that the property in turn would be
generating positive cash flows and return that in greater than required rate of return
(Karampouzis and Ginoglou 2016). The impact of leverage has been well captured by us in the
analysis done for the cash flows projected for the company in which we have well carried out
that the benefits that the project investment will be creating with the various level of investments
that would be done. Now it is important to note that since the cost associated with the leverage
has been comparatively low, this well showed up that in the scenario of 60% debt financing and
equity financing we would be getting the maximum amount of Net Present Value and Internal
Rate of Return, this in turn would be creating an additional value creation for the investment.
However, we should not forget the fact that the cash flows are well based on a estimated basis
and there have been several assumptions which are linked with the same. If a higher amount of
leverage or debt financing is concerned the same might increase the financial risk or the financial
exposure of the company in the form of non-payment of interest expenses on time or delay in
repayment of loan amount. The above challenges well arises due to the increasing risk and cash
flows, uncertainty which can arise. Even though scenario analysis as a risk assessment method
has been applied we well advise that a leverage ratio of 40% debt financing and 60% equity
finance would be the best considered option in this case.

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Conclusion
The above considered property located in Sydney is considered sound for investment
perspective as analyzed given the cash flows that it would be generating and the overall
percentage return it would create. Risk Assessment done for the project helped us better analyze
the situation involved in the project and how changes in key factors could result in the overall
change in decision about the project. After inclusion of various scenarios and factors it was well
estimated that the project investment for property in turn would be generating positive cash flows
and return that in greater than required rate of return.

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References
11/65 York Street, SYDNEY, NSW 2000 - Real estate for rent - homesales.com.au 2020.
Available at: https://homesales.com.au/details/commercial-properties-for-sale/sydney-nsw/level-
11-65-york-street/3308965 (Accessed: 18 March 2020).
65 York Street, Sydney, NSW 2000 - Office For Lease - realcommercial 2020. Available at:
https://www.realcommercial.com.au/for-lease/property-65-york-street-sydney-nsw-2000-
503480062 (Accessed: 18 March 2020).
Aljifri, K. and Ahmad, H.I., 2019. Choosing Valuation Models in the UAE. In ICT for a Better
Life and a Better World (pp. 191-203). Springer, Cham.
Karampouzis, A.D. and Ginoglou, D., 2016. Accounting Adjustments on the Discounted Free
Cash Flow Valuation Model for Appraising SMEs in Greece. Chinese Business Review, 15(10),
pp.498-506.
Multiple Levels, 65 York Street, Sydney NSW 2000 - Office For Sale | Commercial Real
Estate 2020. Available at: https://www.commercialrealestate.com.au/property/multiple-levels-
65-york-street-sydney-nsw-2000-2015347593 (Accessed: 18 March 2020).
Pinto, J.E., 2020. Equity asset valuation. John Wiley & Sons.
Sold Office at Level 3, 65 York Street, Sydney, NSW 2000 - realcommercial 2020. Available at:
https://www.realcommercial.com.au/sold/property-level-3-65-york-street-sydney-nsw-2000-
5746667 (Accessed: 18 March 2020).

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Tham, J. and Vélez-Pareja, I., 2019. Top 9 (unnecessary and avoidable) mistakes in cash flow
valuation. Available at SSRN 496083.
The 15 Best Suburbs to Invest in Sydney in 2019 (2020). Available at:
https://www.yourinvestmentpropertymag.com.au/expert-advice/ahmad-imam/the-15-best-
suburbs-to-invest-in-sydney-in-2019-261931.aspx (Accessed: 16 March 2020).
Unique Serviced Offices on York Street 2020. Available at:
https://www.sidespace.com.au/offices/for-lease/in-sydney-nsw/5bfcc18b96f6e/65-york-street
(Accessed: 18 March 2020).