Net Operating Income for the Year £ 1,873,726.8
Your current investment horizon is ten years. You are aiming to sell the MUL after that period at a yield of anywhere between 5% and 6%.
However, you also expect the yield to compress due to the increasing level of cross-border real estate investment in Manchester. Transaction cost can be assumed to be 4% to 4.5% of the estimated sale price.
For this investment, you plan to use 30% of equity and you have obtained a financing agreement in principle from your bank at 200 basis points (spread) above the current Euribor 3 month rate (refer to https://www.euribor-rates.eu/en/current-euribor-rates/). Y
ou may expect a risk premium of 25% (assuming, Beta = 0.9) above the current UK 10 year treasury bond rate (refer to https://markets.ft.com/data/bonds).
In order to make a sound investment decision, you need to:
1) Determine Potential Gross Income (PGI) and Vacancy Allowance for the MUL based on the information for comparable properties (see Exhibit I)
2) Reconstruct a proper operating statement to determine the Net Operating Income (see Exhibit III)
3) Build a 10-year Pro Forma forecast using proper financial modelling standards
4) Incorporate all uncertainties into your forecast (applying the tools, theories and concepts from this unit)
Determine the maximum bid price for the MUL, considering 12% of the sale price as transaction cost and taxes, and based on the NPV evaluation of the unlevered cash flows.
As a cautiously optimistic investor and considering the economic climate, instead of using the mean NPV, you are willing to accept a 25% risk level.
x What would be your bid price for the MUL?
x Provide a critical evaluation of the uncertainties, assumptions, considerations and options behind your calculations and decisions with reference to the relevant theories. Include a sensitivity analysis.
