• Internal Code :
  • Subject Code : QSP7BEC
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  • Subject Name : Economics

Introduction

Before purchasing land, one has to consider its viability. Therefore it should be in a strategic place where its value for money can be achieved. Raw land development requires proper strategies and exploiting all the possible options before opting to acquire and developing it.Therefore; you have to evaluate ways in which the returns will be positive and run for many years. Proper evaluation is very important since it will give you a hint of the risks and predicaments you will encounter all the way. One of the most pertinent issue is calculating the residual income.

Residual profit calculation is very vital in identifying whether the land will be profitable. This income refers to the surplus profit which residues after a capital charge(opportunity cost-the value of the forgone cost where choice has been made) has been covered.(magni,Carlo Alberto 2009).A residual income model is a valuation method built on the idea that the company’s stock equals the current value of future residual profits discounted at the appropriate cost of equity. Residual profit that turns to be positive indicates that the land owner has met the minimum return threshold while a negative one indicates failure to meet it.

Therefore, I calculated the residual profit of the land you want to purchase before advising you on the way forward.

table shoes calculation of  the residual profit of the land you want to purchase
table shows calculation  the residual profit of the land you want to purchase

Formula:

Residual income=Operating income-(Percent cost of capital × Average Operating cost)

Size of letttable area=90%×1800m^2=1620m^2

Anticipated rent: 1620per m2 × 500m^2=€810000 per month

Net rent: €810000 × 12=€9720000

Construction Cost: 1800m^2 × 3800pemr ^2=€6840000

Finance rate: 0.04 × 684000=€273600

Total construction cost=€6840000 + €273600=€7113600

Total cost: (7113600+12000000)€= €19113600

Residual profit: €9720000-(0.07 × 19113600)=€8382048

Therefore the residual profit of this land will be £8.382 above the minimum expected return. According to the figure, it clearly shows that if you purchase this land and develop it, you will be in a position accrue a good profit after financial obligations or bills have been taken care of.

Sensitivity analysis on the residual profit is used to determine how different independent variable values are affected by a given dependent variable under a particular set of assumptions. It involves the changing of one variable to see how sensitive the outcomes of an investment are affected by that change. There might be risks that occur and affect the residual profit in the long run. These risks therefore have to be analyzed before a client develops a raw land or rather identifies how to introduce improvements to avert the risks. Simulating a single path from the underlying system or from an associated system and applying the Radon-Nikodym measures: one can estimate the performance sensitivities of the underlying system with respect to some parameters(vector parameters) and extrapolate the performance measure of the different values.(Arsham,Hossein 1989).Risk identification and allocation is a key component .A project may be a subject to a number of technical,environmental,economic and political risks.(Cardenas,Geert,Voordijk 2018)

In as standard premise, if you increase the rent the tenants might vacate the building and therefore vacancy rate might go high. Tenants will have to opt for a house that is at least economical. On the other hand, if you decrease the rent, the tenancy rate might go high since the house is cheap compared to others. Therefore, you have to run both tests at the same time then compare the results. You should analyze the lowest amount of rent you can charge and still make good profit.

It is also vital to examine is the amount of the down payment and how it will affect the properties potential profit in the end. Knowing beforehand the least you need to pay in order for you to make profit gives you room to estimate how much leverage you will need to have .You also have to estimate debt coverage ratio, the annual loan and the cash on cash return.Each one of this will give you a proper insight when deciding how a this property will fit in with your other investments.

Another worthy variable evaluation to explore is loan amount versus the interest loans attached to these loans. Comparing these two variables will assist you identify what your monthly mortgage rate will be if you have been given loan of a given interest rate. This one makes it very easy to compare and weigh lenders to see which one will offer a loan with the possible monthly payments of installments.

It is worth considering the number of apartments already in place in the area you want to establish yours. Compare the different trends the houses have been built and imagine coming up with a new design that may shift the customers attention to your place. If you build something similar to the others or maybe below their cadre, the customers may not be wooed to your side.

Overheating is very common problems in buildings since the architectural design mostly do not incorporate passive cooling techniques. This problem can be a turnover for clients and affect the residual profit in the long run since the customers will want a building that is somewhat accommodating. The best performance in terms of summer comfort can be achieved from combination of diverse variables that would be important in respect to solving the overheating problem. This includes measures such as solar protection and night ventilation. To reduce such a problem, you can come up with a micro wind turbine that is built of static blades and rotor blades. It is installed in rooftops and provide a proper cooling system in the building and its economic since it requires wind. Therefore you will have to evaluate if you build an apartment without the cooling system will it be enticing to customers as compared to the ones installed.

Land rates mostly tend to high depending on the place where the land is situated. These are levies that are imposed on all parcels of land and payable to the government. The fluctuation of the rates may affect the residual profit since you might be required to pay more than what you planned for. These rates are usually evaluated and determined by the government. Therefore, you have to weigh in on the trends of this rates and evaluate if you will be affected drastically in the end whenever they go up.

Site management is also very key in carrying out the sensitivity analysis of your project.. You have to find a good property manager who will be involved in the day to day running of the building in order to achieve high end results. Proper management entails doing market research to be able to come up with the current trends to be able to satisfy the consumer needs. One has to ensure that the finances are properly managed and debts owned by the premise including land rates are paid to ensure that insolvency doesn’t cripple in which May results in auctioning of the business. Mismanagement therefore is a very high risks that you to put into consideration and avert it for your business to thrive well and maintain a steady residual income profit. In the event that your premise is poorly managed, the tenants will vacate it, however when it is well taken care of, it will attract a large number of customers since they know you have their interests at heart.

Natural calamities such as fire and floods usually pose a very high risk and cause a reduction in the residual profit and therefore have to be analyzed. When it comes to fire, you should ensure that your building has adequate firefighting machines suited in all floors and can easily be accessed in the case of fire breakout. An alarm system is also very important to be established. In the event of fire, it goes on and alerts the firefighting department who will in turn chip in faster before it goes out of control. A fire assembly point needs to be established near the building where every person can be accounted for quickly and avert the scourge. Floods on the other hand also pose a major problem. You therefore have to identify that the drainage system of the land you want to establish a construction is good. A flooding land quickly turn away clients and this means that that the residual profits will reduce.

Insuring your building against scourges like fire is also important in mitigating high financial losses in the case of an occurrence. Insurance company will account for the damages that have been incurred and this may save your spending. The transport system is also an important consideration. Inaccessible roads to your building make it less competitive. A client normally wants a place that they can easily reach and has a good road network that connects to the main road. A building that is strategically placed and close to a well-developed place becomes a darling to many customers since .Institutional offices are normally placed in such buildings since they act as landmarks and they can be easily reached.

Theft and insecurity is also a very a high risk that you should consider. Clients normally want a secure place free of theft and violence. If the your land is not situated in a well secure area the fear factor turns the customers away and this makes your building not to maximize on the residual profit. This will make you undergo losses.

Building Research and Environmental Assessment Method (BREEAM)

This is a sustainability assessment method that is used to master plan projects, infrastructure and buildings. Launched in 1990 by the Building Research Establishment(BRE).It set standards for the environmental performance of buildings through design,specifications,constructions and operation phases and can be applied to new developments or refurbishment schemes(Richard McPartland 2016)

The BREEAM rating benchmark level is important because it enables a developer or a shareholder to compare an individual buildings performance to other BREEEAM rated ones and this result in development as it inspires them. Certified BREEAM property investments makes them attractive and generate sustainable environments that makes it perfect for the people who live and work in them to achieve an excellent breeam,certain critical factors like pollution, transport and materials have to be put into consideration.

Energy is very crucial in achieving excellent breeam.Electricity should be readily available in the place where construction is to be done. Most machines in a building construction require power in order to for them to operate since other sources like generators will prove to be costly in the tail end. This source of power is used in the day to day running of activities in the building like lighting and powering machines. Use of renewable energy like solar water heating machines and propelled wind turbines for cooling is also economical. This water heating machines are normally connected to the solar installed on roofs. The solar panels tap in energy from the sun and use it convert to power that heat up the water that is used in hot showers. On the other hand, the house may be affected by thermal heat which renders it unconducive.The wind driven turbines regulates the temperatures by providing a cooling effect. This makes the building to economize on electricity and yet providing very essential services which makes it habitable.

Another essential factor in achieving bream is water. There are places where water is very scarce hence becoming expensive in availing it.Water is something that is inevitable in people’s lives and therefore a building has to avail it.Its acquisition can be achieved in numerous ways:First,you can get a connection from the one that runs along the streets for use by the people of a given area. This source of water is mostly not dependable since the dams can run low and the company begins rationing to its clients or breakages of the pipes that bring water to you area.

The second and the most effective method is digging a borehole. This is a dependable source of water since it is only used in one building and can be easily managed. Another source although not reliable is constructing tanks to harvest rain water. Even though it cannot be relied upon, it is important since it can be used as a substitute in the event the other sources run out. A place that has constant run of water will be ideal for occupation since essential services like cleaning is within reach.

Transport plays a pivotal role in attaining excellent breeam.A building should be suited in a place that is well accessible. The roads should be passable well connected and maintained. A good transport network serves as a luring factor to clients since they can easily access shops and other essential services within their disposal. In the event the road is not good you have to come up with ways of improving the road leading to your and in order to satisfy the needs of a client.

Health and wellbeing is also an important factor in breeam.External and indoor issues like noise, light, air and quality are brought to the fore. Your building has to be well ventilated to allow free flow of air to avoid complication like suffocating the occupants. It also has to be well lit for efficiency. It should be free from noise and so therefore you have to choose from a less congested area. Quality is very key; the house should be built strongly by highly skilled personnel.

Good management should also be at your disposal to see to it that the building is run smoothly. From the onset of construction, someone has to oversee that the resources used are not being misused or being stolen.Moreso, one has to check on the expenditure and come up with ways in which the cost of running can be minimized while maximizing output. After construction, a property manager has to be employed to run the building. He/she has to ensure that the property is well maintained and in order to reduce the cost of carrying out repairs. If possible a guard has to be employed to protect the property from theft and misuse by the clients. The manager also has to ensure that bills for instance electricity and water have been duly paid on time to ensure that the building stay connected. This motivates the clients since their needs are well taken care of and in return they pay their rent on time without compromise or delay.

Materials used should also be considered. First, during the construction, a client has to ensure that the materials acquired are certified and are of good standards. This ensures that the building will last for many years without having to carry out constant repairs. In the event that shoddy materials have been used the property may not achieve the desired design designated in the plan and may even collapse in the long run. To minimize costs, the materials used should be used properly in good proportions. Environmental impact of the building materials should also be a concern, they should not in way be harmful to the surrounding.

Waste management also plays part in achieving excellent building research establishment environmental method. For instance, a client has to ensure the building is connected to a proper sewer line. Connection to a sewerage system is very important because of disposing waste coming from the building. The sewerage line has to be constantly kept I n check to avoid breakages since this will result in dirt piling up and may give rise to waterborne diseases like cholera and typhoid. Dust bins also have to be installed in the building where it will be accessible to all clients. It should be emptied as often as possible to a garbage collection point and the bins sanitized to maintain high level of hygiene.

In the event you want to develop a company, pollution is a factor that has to be put to the fore. The building has to be designed in a way that it will reduce its carbon emissions to the air. These emissions normally affect the ozone layer. Liquids effluents also have to be purified to ensure that the toxic levels have been reduced as much as possible before being drained outside. Pollution of the environment is so hazardous since it greatly affects bio-diversity and results to global warming.

Land use and Ecology should also be factored. It is very important that you appoint someone to carry out an ecology assessment. It may be an arboriculturalist or a landscape architect. An ecologist plays an important role as he/she works with the design team to come up with something tangible. Ecological recommendations criteria requires that the team comes up with ways that will benefit the local wildlife population.

Alternative Sources for Funding the Project.

Project finance is the financing of long term infrastructure using a non-recourse finance structure. You may not have the required capital to kick start your desired project. Therefore you have exploited other options of finding resources to finance your projects. The options at your disposal include:

Debt Crowd funding: This is similar to acquiring a loan from a bank in various ways; however it normally has lower interest rates compared to banks. A debt crowd lending investor will avail capital to a growing business entity and in turn receiving shares for their investment. The lender will not only receive shares from profit but they may also be able to sell their shares for a profit. In the meantime, the entity agrees to repay the initial loan over a fixed repayment period.

Debentures: These are loans secured by a fixed or floating charge against a company’s assets. Debenture holders receive their interest payment before any dividend is paid to shareholders and if the business fails the holders will be preferential creditors. (Grants, 2014).

Micro loans from small businesses that avail themselves as micro lenders and nonprofit organizations who offer short terms micro loans can be a source of funding. The micro lenders usually give a short repayment period of about 5 years and the size of the loan they offer also tend to be little.

Venture Capital is also an alternative source of funding. Here, monetary long term investments are provided in exchange for equity in business. The money is invested by pooled resources from individuals and insitutions.This is different to bank loans and other financing organs since there is no interest paid and the money does not need to be repaid since you all pooled your resources together. However, it is a risky venture since there is uncertainty in the creation of profit.

Bank loans: This is one of the major sources of alternative funding. Here, you borrow for substantial amount of money from a bank and then you agree on the repayment period and by what installments. Mostly, you must be a client of the bank over a given period of time and you must have proven your worth by your savings and presenting securities such as title deeds. The disadvantage of this method of financing is that it accrues high interest rates.

Assets finance funding: Here, clients seeking equipments to help start their business venture are availed with the building materials which you are not required to build the full amount upfront. Instead, assets will be paid for over the lifetime of the lease in installments until you clear with the financier.

Another source of funding is peer to peer lending platforms. Here, loans are arranged from a team of individuals or organizations to entrepreneurs looking to build theirselves.Its a way of getting funding without having to go to the bank and lenders use this like a marketplace where they decide on who to lend the money.

Pension Backed loans: This is where you can be able to receive a commercial loan using a business owner’s pension pot. This type of funding enables the owners to use their savings in the pension to lend funds to people and companies at commercial rates. Security is then taken to act as a guarantee for the repayment of the loans. Assets which include which include a range of intellectual property provided it has been professionally evaluated are used as securities.

Angel networks is also a source of funding where start up entrepreneurs rise as result of business angels. They comprise highly auspicious and self-made entrepreneurs who acquire shares in potential stage company using their own money. If you want to establish a business, and you are short of funds, such entrepreneurs will chip in.

Private Equity: Here investors help businesses to boost their growth by extending into new markets or buying competitors to consolidate their position within a sector. You can also find alternative sources of funding by the sale of your properties. For instance, if you have a parcel of land, you can opt to sell it or in part in able to finance your project. This is a good source of funding unlike loans that are repayable and comes with a lot of interest on top.

Conclusion

Before you decide on establishing a project construction, you have to evaluate all the possible outcomes that accompany such a venture. Ensure that you establish that the business will give you proper returns in the long run. Put into consideration all the advantages, disadvantages and the market trends to ensure that you set up a very viable project that will be profitable.

References

Cardenas, I; Voordijk, K, H, Geert, D, 2018.European Journal of Transport and Infrastructure Research.

Grants, 2014.Business Finance.

Koh, Jae Myong, 2018.Palgrave Macmillan pp 109,130

Magni, C.A.2009.Splitting up value. European journal of Operation.

Richard McParland.2016

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Economics Assignment Help

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