Group Valuation Assignment
Find a house or apartment that you would like to research. From here on this will be referred to as a house or property or home regardless of whether it is a house or apartment. The house can be in any country (and we especially look forward to reading those assignments on overseas houses) so long as you can find enough details about the home and the other variables discussed in the below questions.
If you choose to research an overseas property, be consistent with using that country’s currency in your answer to all questions. There’s no need to convert the currency to Australian dollars, just state your answers in the appropriate currency.
Question 1 (1/2 Mark): State the house’s full address and important details such as the number of bedrooms and bathrooms, floor space and any other aspects that you think are important. Include a small picture.
Question 2 (1/2 Mark): Estimate the home’s value based on an average of similar properties that have sold recently. Using a table, set out the details of the other properties and why you think that they’re comparable. The table should have at least 5 columns including the addresses, number of bedrooms, floor space, last sale date and price. You can include other columns too if you think they’re important. The first row of the table should include the details of the property you’re valuing which was stated in Question 1, and the other rows (include a minimum of one other property to compare) should show the details of the other similar properties. Here is an unpopulated example table:
|Details of Comparable House Prices|
|Address||Bed-rooms||Floor space (m^2)||Last sale date||Last sale price|
|<Replace this first row with the details of the property being valued>|
|<Replace with comparable property one>|
|<Replace with comparable property two>|
|<Replace with comparable property three>|
|<Calculate and report the average of the comparable properties’ prices only here>|
State your value estimate and sources.
Question 3 (1 Mark): Estimate the gross annual rental revenue from leasing this home if you were the landlord and chose to rent it out to another person. You might find similar rental properties and take an average of their actual or advertised rents. A table similar to the one used above might be appropriate. The gross rental revenue ignores costs of renting. Ignore the intra-year time value of money effect. So for example, even though rent might actually be $3,000 paid monthly, assume that it is 36,000 (=12 * 3,000) paid annually at the end of the year. Reference your sources.
Question 4 (2 Marks): Estimate the annual rental costs of leasing your home if you were the landlord and chose to rent it out to another person. Similarly to the above, ignore the intra-year time value of money effect. Be sure to present your figures using a table. Reference your sources.
Question 5 (2 Marks): Estimate the annual growth rate of rents. Provide arguments as to what the annual growth rate of rents should be. Reference your sources which may include data from your country’s government statistics agency.
Question 6a (1 Mark): Assuming that your property lasts forever, use the ‘perpetuity with growth’ formula to find the implied total required return (r) based on the estimated house price, net rent and rental growth. Note that net rent equals gross rental revenue less rental costs.
Price = Net Rent / (r – g)
Question 6b (1 Mark): Is this perpetuity model suitable for valuing your house? Explain why or why not. If you think that the perpetuity model in the above form is unsuitable, make some adjustments or use some other model to estimate a more accurate implied total required return. When answering the below questions, use this implied total required return.
Question 7a (1 Mark): Find the current inflation rate in the country where your house is located. State the exact version of inflation that you found, as well as the source and the date that the inflation rate was observed.
Also present a table showing the weights (in %) of the different categories of items (usually goods and services if you’ve used the consumer price index or similar) that make up the weighted average inflation calculation. For example, the Australian CPI has weights in food, transport, housing, and so on. This table should have at least 2 columns for the name of the item and its weight.
Question 7b (1 Mark): Compare the inflation rate to the implied total required return on your home and comment on whether one should be higher than the other or if they should be equal.
Question 7c (1 Mark): Compare the inflation rate to the growth rate of rents on your home and comment on whether one should be higher than the other or if they should be equal.
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