Real Estate as a Financial Asset

Office building investment decision

Term Paper , 2008 , 54 Pages , Grade: 90%

Business economics - Investment and Finance

A developer named Jemima bought a plot of land. She acquired this in order to develop the land, want to erect an office-building complex and to sell this one after completion of constructions. The question is, at which point of time should she starts the construction works with the aim to maximize the surplus of the property development, when she going to sell it. Based on a few key assumptions, it should be examined, what could be possible strategies and how the uncertainties of future expectations can influence these decisions. The assignment transfers the share market instrument of "options" to the real estate market investment process.

Table of Contents

• 1 Introduction
• 2 General Assumptions
  • 2.1 Land characteristics
  • 2.2 Loan characteristics
  • 2.3 Construction characteristics
  • 2.4 Sale characteristics
  • 2.5 Time characteristics
• 3 Standard Project Scenario
• 4 Alternative Project Scenarios
  • 4.1 Alternative case 1 – extra cost for management and holding
  • 4.2 Alternative case 2 – change in volatility of office properties
  • 4.3 Alternative case 3 – change in correlation of volatilities
  • 4.4 Alternative case 4 – change in land increasing rates

Objectives and Key Themes

This assignment aims to analyze the optimal timing for constructing an office building to maximize development surplus. The analysis will focus on a developer's decision process under different scenarios, considering factors like land value growth, construction costs, and market volatility. The key themes explored are: * **Optimal Development Timing**: Determining the best moment to begin construction to maximize profits, considering the time value of money and market fluctuations. * **Uncertainty in Real Estate**: Examining the impact of uncertainty in future expectations for construction costs, property values, and interest rates on investment decisions. * **Scenario Analysis**: Evaluating different scenarios to understand how changes in key factors (land value growth, construction cost volatility, etc.) affect the feasibility and profitability of the project. * **Financial Modeling**: Using financial models to assess the return on investment and potential risks associated with developing an office building at different points in time.

Chapter Summaries

Chapter 1: Introduction

This chapter introduces the scenario of a developer named Jemima who owns a plot of land intended for an office building complex. The assignment explores the optimal construction timing to maximize development surplus upon selling the completed complex.

Chapter 2: General Assumptions

This chapter establishes the baseline assumptions for the financial model, including land characteristics, loan terms, construction costs, sale conditions, and time parameters. It focuses on defining the "standard case" as a starting point for analysis.

Chapter 2.1: Land characteristics

This section outlines assumptions regarding the land, including its suitability for development, 100% financing by credit, land value increase rate, possibility of selling undeveloped land, and the inclusion of inflation in the increasing rate of the land.

Chapter 2.2: Loan characteristics

This section details the loan characteristics, including the assumption of equal interest rates for land and construction loans across development stages, consideration of interest payments on the land loan, and incorporation of loan payments for construction into the cost.

Chapter 2.3: Construction characteristics

This section describes construction cost payment terms, construction time, and standard volatility of construction costs.

Chapter 2.4: Sale characteristics

This section outlines assumptions regarding the estimated value of the completed office property, including the timing of income cash flow, volatility of development value, and development period.

Chapter 2.5: Time characteristics

This section defines the development period, the possible starting points for construction, and the latest completion deadline. Additionally, it assumes a direct positive correlation between construction cost and property value movements, highlighting that all assumptions apply to alternative cases unless otherwise specified.

Keywords

This assignment focuses on real estate investment, office building development, optimal timing, financial modeling, development surplus, uncertainty, scenario analysis, market volatility, construction costs, land value growth, and loan characteristics.

• College: University of Wuppertal
• Grade: 90%
• Author: Ulf Klose (Author)
• Publication Year: 2008
• Pages: 54
• Catalog Number: V126266
• ISBN (eBook): 9783640322947
• ISBN (Book): 9783640321025
• Language: English
• Tags: Real, Estate, Financial, Asset, Office