Discounted Cash Flows for REITS-ASX companies
Question:
If The Required Rate Of Return Is 20%, Should This Project Be Accepted?
A REIT is a criteria, other than financial criteria, to accept an investment project is given by strategic considerations. It is a topic that lends itself to the debate since no one ignores – for example, to take a look at the central headquarters of the big financial and industrial companies – that a great part of the decisions of investment are taken for reasons of prestige, with Exclusion of the investment-benefit-risk analysis, and another non-minor part is taken for reasons of necessity. Prestige, need, positioning in the market, competitive size, are criteria invoked when making decisions (Mattarocci, n.d.).
Discounted Cash flows for REITS-ASX companies
Expected rate of return
Q1) cost of purchase
Cost of sale= $ 300,000
Purchase cost= selling price + buying expense
= 300,000 + 4 % (300,000)
=300,000 + 12,000
= $ 312,000
- b) Calculate the annual net rent from the property over the period of 2018 Until 2021
2017= $ 300,000
2018= ( 3.5% * 25,000 ) + (25,000) = 25,875
2019 = ( 3.5% * 25,875 ) + ( 25,000) = 26,780
2020= ( 3.5% * 26,780) + (25,000) = 26,987
2021= ( 3.5% * 26987) + (25,000) = 26,944
2022= ( 3.5% * 26944) + ( 25,000) = 26,943
- C) Expected sale price for this property
Price in 2021= initial capital outlay + ( 1 + 1.8%^4)
= 300,000 (1.070)
= $ 322, 190
- d) Selling price of the property in 2021
NPV = ∑ {Net Period Cash Flow/(1+r)^T} – Initial Investment
Where r = rate of return, and
T = the number of time periods.
300,000( 1 + 8%^ 4) – 300,000
408,146.88-300000= $ 108,146.88
Profitability Index( PI)
= 108,146.88 / 300,000
= 0.36
This is less than 1 which is a viable project according to profitability index
IRR =
where:
Ct = cash inflow of the period t at net
Co= investment initial costs
r = rate of discount, and
t = periods number
IRR= 300000 (1.08^ 5- 300000
= 440,798 – 300000
= $ 140,798
- e) Would you vote for this project and why
YES I WOULD
Why-
The project should be accepted since it is has a positive NPV and IRR. Negative npv means that the project npv is not the best and the rate of return for the project is not going to yields any positive cash inflows. It runs at a loss.
Starting with the second, it should be pointed out that the person responsible for the decision to accept, in addition and before verifying the acceptability shown by the figures, it is very useful to know the human nature and the professional quality of the one who presented the figures, taking into account That in these cases, as dangerous can be the excessively optimistic or launched as the fearful, always ready to flee from risk for fear of being wrong (Lombardi, 2010).
Moreover, although there are no reasons for need, convenience or image, which I have just quoted, it may be perfectly reasonable, valid, and expedient to make investment decisions that financially would not be self-justifiable, as many businesses do, Multidivisional companies are successfully competing and started through investments in projects that were already known to be not profitable in and of themselves (Wang And Chan., 2015).
NPV
Research on the following Australian REITS
- Goodman Group ( ASX Code: GMG )
This is an Australian industrial and commercial property conglomerate or group that deals with managing real estates including, developing, owning and managing real estates including office parks, business facilities, global freight warehouses and large scale logistics. It is listed in the ASX and its stocks are currently valued at A$ 8.23. Its market capitalization runs into 3.5 billion Australian dollars. Its management structure is vertical structure which is from top to bottom. It is headed by a CEO and a management structure of high level managers who are departmental heads whish is a good structure with hierarchy of authorities.
- Aims Properties Securities Fund ( ASX CODE: APW)
It is a listed property management company which provides consultancy in a broad portfolio of both listed and unlisted property funds and has a property trust of high yielding investments. . It is listed in the ASX and its stocks are currently valued at A$ 2.3. Its market capitalization runs into 5 billion Australian dollars. Its management structure is vertical structure which is from top to bottom. It is headed by a CEO and a management structure of high level managers who are departmental heads which is a good structure with hierarchy of authorities.
Lantern Hotel Group ( ASX: Code LTN)
This is a property trust group in Australia, it mainly focuses on the hotel management and ownership and development high end hotel facilities. The investment in this type of project is high and usually a has a high return. Its market capitalization runs into billions of Australian dollars spread across the whole of Australia. Its management structure is horizontal and is headed by a chief executive officer who has a broad support structure.
Carindale Property Trust ( ASX; Code CDP)
This is a real estate property investment group which specializes in property and real estate management. Carindale has a sole investment of 50% in westfield carindale. Its market capitalization runs into billions of Australian dollars spread across the whole of Australia. Its management structure is horizontal and is headed by a chief executive officer who has a broad support structure (Einhorn, Emmerich and Panovka, 2006). Moreover, although there are no reasons for need, convenience or image, which I have just quoted, it may be perfectly reasonable, valid, and expedient to make investment decisions that financially would not be self-justifiable, as many businesses do, Multidivisional companies are successfully competing and started through investments in projects that were already known to be not profitable in and of themselves
Dexus Property Group ( ASX Code: DSX)
Founded in 1984, Dexus is a real estate investment trust which manages, develops and has high trading in Australian office blocks and commercial and industrial property. Its market capitalization runs into billions of Australian dollars and currently trades in the ASX at A$ 10.24. It has a horizontal structure which is headed by CEO Darren Steinberg (Bodie, Kane and Marcus, 2014).
- Average monthly returns
average monthly returns = cumulative total of months / number of months
Lantern Hotel Group ( ASX: Code LTN)= 3.226/37
Profitability Index(PI)
=0.087
Dexus Property Group ( ASX Code: DSX =289.99/38
= 7.63
Carindale Property Trust ( ASX; Code CDP) = 258.68/ 37
= 6.807
Aims Properties Securities Fund ( ASX CODE: APW)
44.46/37
= 1.202
Goodman Group
224.93/37 = 6.079
Monthly variance
S^ 2= ( x – Xmean ) ^2 / n-1
Real estate investment trust, rental alternative Economy
The boom in construction has led several owners to go to the trust as a new investment alternative
The Business Group assured that real estate investment trusts are consolidated as a safe, stable and profitable option in the real estate operations (Block, 2013). companies specialized in real estate, construction companies, trustees and stock brokers have created Real Estate Funds and real estate investment trusts, through which a group of assets Real estate (warehouses, offices, commercial premises and urban housing of high strata) forming a bag that generates a monthly income and an important valuation.
According to the entrepreneur, investing in a real estate investment trust has several advantages over a traditional root farm operation. “The investment is diversified and backed by real estate assets, so, the investor acquires a permanent income, since he receives income from all the real estate in such a way that the eventual vacancy of one real estate will be offset by the occupation of the others,.
The real estate investment trust is strengthened by generating profit for the constant valorization of the real estate, added to it and in case liquidity is required, the properties are easily traded for their qualities (Block, 2013).
Real Estate Investment Trusts have an investment committee made up of expert people, which guarantees that the properties linked to the trust comply with the necessary conditions to generate the valuation, income and commercial attractiveness that allow the fulfillment of the projected figures.
Conclusion
“The tenants of the trust properties are usually top-tier companies with long-term lease contracts,”
For the businessman, this legal figure under the Australian Civil Code and also endorsed by the Code of Civil Procedure, instrumented by a trust agreement registered with the financial superintendence, constitutes a versatile tool that replaces other options more complex from the point of view Legal, tax and logistics. “It’s certainly the best alternative for property protection (Block, 2012).
pointed out that the return on real estate investment corresponds to the combination of the monthly rent produced by the property and its corresponding valuation over time, depending on the type of property, monthly rent and valuation (Lombardi, 2010). All this makes the legal or natural persons find new investment alternatives in the real estate sector, as is the case of the real estate investment trust.
References
Block, R. (2012). Investing in REITs. Hoboken, N.J.: Bloomberg Press/Wiley.
Block, R. (2013). Investing in reits. Hoboken, N.J.: Bloomberg Press.
Bodie, Z., Kane, A. and Marcus, A. (2014). Investments. Maidenhead: McGraw-Hill Education.
Brueggeman, W. and Fisher, J. (2016). Real estate finance and investments. New York, NY: McGraw-Hill Education.
Einhorn, D., Emmerich, A. and Panovka, R. (2006). REITs. New York: Law Journal Press.
Geltner, D. (2014). Commercial real estate. Mason: OnCourse Learning.
Lombardi, S. (2010). Real estate investment market. New York: Nova Science Publishers.
Mattarocci, G. (n.d.). Anomalies in the european REITs market.
Sing, T. and Ong, S. (2004). International real estate. [Bradford, England]: Emerald Group Pub.
Wang And Chan. (2015). Reits. [Place of publication not identified]: Oxford Univ Press.
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