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Property Investment Analysis to an Income Producing Property in Australia Report

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Updated: Apr 25th, 2022

Property: 20 Hindmarsh Square, Adelaide, SA 5000

This is a rental apartment located in the South of Australia. It is currently rented at $250 per week. It is large, air-conditioned and has one bedroom. It also contains a spacious living room and one car park. The Hindmarsh property has facilities like a pool, gym and spa. It neighbors Rundle Street, Hindmarsh Square and Rundle Mall. Its indoor features are an alarm system, a study, a dishwasher, a workshop, and built-in wardrobes. Its outdoor features are: a shed, above and in-ground swimming pools, a deck, a tennis court among others. Additionally, one is able to enjoy eco-friendly facilities from the house. For instance, there are solar hot water and panels as well as a greywater system (Adelaide Property Data & Trends 2011).

Adelaide Property Data and Trends

The current cost of a median property in Adelaide is $550,000, and the median property cost is $300,400.

Demand ratio

The demand to supply ratio portrays that from July 2011 to April 2012, approximately 23 individuals were searching for a house within Adelaide. A demand ratio is a reflection of the average number of individuals who are viewing each property. Demand is the figure of Adelaide houses that have been observed within a given week. On the other hand, supply is the number of properties that have been featured on the Adelaide real estate within a given week. The demand ratio is obtained by dividing demand by supply within a given period. Therefore, the higher the figure the more popular the Adelaide properties are (Adelaide Property Data & Trends 2011).

Supply and Demand for properties in Adelaide

Supply shows the number of properties that were listed on realestate.com at a given period of time. In this case, a week has been used as the period. Demand measures the level of individuals that have been observing the details of the properties that are in the realestate.com columns in a given week. The excel sheet attached calculates the ratio of demand to supply. This is done by dividing the percentage change in demand by the percentage change in supply in a given week.

Interest Rate Trends and yield

The interest rate trend provided by the Reserve Bank of Australia shows that between July 2000 and July 2001, interest rates had been dropping. Between July 2001 and July 2008, interest rates rose while between July 2008 and July 2009, the rates dropped again. However, they started to rise from July 2009 onwards (Adelaide Property Data & Trends 2011). Since 2007, market yields have been ranging between 200 and 300 basis points across all forms of stocks. This is an equivalent of 0.02% to 0.03% interest rate.

Between May 2011 and April 2012, the median house price in Adelaide has been rising and falling. In May 2011, the median price was $795,000 while in March 2012, the median house price was $550,000. This shows that the value of the house dropped by $245,000. On the other hand, the median unit price has been affected in the same manner. In May 2011, the median unit price was $411,500 while in April it had dropped to $300,400. The median price increases when many buyers purchases expensive homes. On the other hand, it decreases when many buyers purchase cheaper homes (Adelaide Property Data & Trends 2011). According to statistics, from August 2009 to January 2010, the office vacancy in Adelaide changed from 4.8% to 7.0%. However, the vacancy rate was stable at 6.1%. Vacancy levels in this region rose from 2.3% in July 2009 to 12.7% in January 2010. This can be associated with the completion of two major developments in King William Street (Frank 2010).

Market rents. From August 2009 to January 2010, Adelaide’s market rents increased. However, since there has been an expected decline in vacancies, the pressure on rentals will rise. This means that demand will increase (Frank 2010).

Incentives: As of September 2011, Adelaide’s incentives were ranging from 5% to 12%. A small increase in grade A stock demand was causing downward pressure on incentives (Frank 2010). This could have affected the level of investment and output.

Real Estate Investment Trust (REITS) is a securitized property market in the US. It is a real estate investment trust that possesses, runs and develops urban offices for tenants that want to start businesses in Canada. It has acquired several properties in various cities such as Toronto, Quebec, Kitchener among others (Allied Properties Real Estate Investment Trust 2012). The international real estate businesses are recovering from the recession. However, the Australian real estate markets are still being affected by inflation which has affected the level of output. In countries like South Africa, property rates are rising. On the other hand, a majority of European countries are still recovering from the fall of the property markets. However, with the presence of the Real Estate Investment Trust, it has been possible to regulate the prices of properties in the US. This is because such an organ has the capacity to purchase large quantities of properties and therefore the speculators are left with no property to buy. The aim of the speculators is to purchase and hold the properties until a later date when their prices rise. However, as a result of regulations by the Real Estate Investment Trust and other bodies, these acts have been minimized. The prices of houses are therefore rising. On the other hand, in Australia, there have been no tough regulations on the behavior of speculators. Although speculation has not been a major issue, it is still risky because it can affect future investors (SAcommercialpropnews: Property Market 2012).

The loan to purchase the Hindmarsh Square, Adelaide property will be $300,400. This is the recent median unit price for Adelaide properties. The interest rate is expected to be a 5-year SmartDoc loan of 7.99%. This is a fixed interest rate loan (Adelaide Bank: Our rates & fees 2012). The monthly payment is expected to be $1,000 which is the monthly rental fee. After the calculations, the monthly installment payment for the loan will be $24,242.71.

Loan Payment
Rate 7.99%
Nper 60
Present value ($300,400)
Type 1
Loan Payment $24,242.71

A fixed-rate mortgage loan enables the borrower to be secure from changes in interest rates. This is because the interest rates are fixed throughout the mortgage payment period. This kind of loan allows the borrower to pay consistent loan amounts. They also protect the amount payable from changes in the market conditions. However, the fixed interest rates can affect a loan borrower because they are inflexible in the long run. Therefore, in case future interest rates reduce, the borrower may not be able to benefit from them. Additionally, if the borrower changes the terms of the loan, he can be fined or penalized. On the other hand, the interest rates of a variable rate loan fluctuate depending on the terms of a given loan. They are not fixed. In Australia, these loans are highly preferred to fixed-term loans. Variable-rate loans can be basic or standard in form. The basic variable interest loans have lower interest rates than the other loans. However, they have no other benefits other than low interest. The standard variable loans provide very important options in loan repayment and management. For instance, the split loan capability. These benefits are however costly as compared to a basic variable interest rate loan. A variable interest rate loan can help one to save money. Variable interest loans are also very flexible. However, they have their own share of disadvantages. For instance, the installment payments are subject to change. The interest rates are also volatile (Choice Home Loans: life is all about Choice 2012). When a loan is subjected to plain interest, it means that there are no conditions set that can affect a borrower. There are no consequences accompanied by a change of payment terms. However, changes in interest rates will have to affect the amount of loan payable. This type of interest is very flexible but it may have very little benefits to the borrower.

Ratio Analysis

Ratio analysis is a measure of the relationships among different financial statement components. These ratios are used to determine various trends in a given period of time. They can be used by companies to compare several businesses in an industry (Ratio Analysis 2012). There are also ratios used to measure the viability of an investment. They are used by investors when they are buying properties. Some of them are the Cap Rate and the Gross Rent Multiplier ratios.

Cap Rate (Capitalization Rate)

This ratio is used to estimate the value of the real estate. It is calculated by dividing the net operating income by the price of selling. It is used by people who lend and those that want to invest in order to approximate the cost of purchasing properties for income creation. Therefore, the operating income is calculated by gross income minus vacancy amount and expenses. If the vacancy rate is 12.7% and the vacancy amount is 38,150.80, then the operating income will be $300,400 minus $38,150.80. Therefore, the cap rate will be $262,249.2 divided by $300,400. This will give rise to a cap rate of 87.3 percent (Real Estate Investment Software: Ratio Analysis Report 2012).

Gross Rent Multiplier (GRM)

This is a ratio that estimates the value of a property that is expected to generate income. In order to calculate GRM, the cost of selling and the amount of rent payable are necessary. A monthly or an annual gross rent multiplier can be used. The monthly gross rent multiplier is calculated by dividing the selling price of a property by monthly rent income. On the other hand, an annual gross rent multiplier is calculated by dividing the selling price by the annual rental income. In this case, the selling price of the property is $300,400 and the monthly rental income is $250 multiplied by 4 weeks. Therefore, the monthly GRM is $300,400 divided by $1,000. This is equal to 300.40 (Real Estate Investment Software: Ratio Analysis Report 2012).

Recommendations

Given the challenges that the real estate business is facing, it is important that investors analyze a property before purchasing it. They should carry out ratio analysis in order to determine the viability of an investment.

Additionally, they should also consult different investment agents such as Adelaide and the Real Estate Investment Trust in order to determine the best market rates. Such organizations have a massive knowledge of the property rates and are likely to provide very helpful information.

I would also recommend that businesses should assess the various kinds of mortgage interests before they can actually apply for a loan. Fixed and variable interest rate loans have both advantages and disadvantages. The investor is supposed to way both of them in order to determine the most viable one.

Conclusion

It is evident that the real estate business is growing. However, it is being affected by economic factors such as inflation and rising interest rates. This has necessitated the coming up of organizations that manage and properties on behalf of businesses and individuals. For instance, the Real Estate Investment Trust is owned by the US. Such bodies can regulate the level of speculation in the real estate business, therefore, ensuring that prices do not fluctuate with a high margin. Additionally, ratios have been formulated in order to project the expected income of an investment. These ratios are the Cap Rate and the Gross Rent Multiplier. These measures help an investor to analyze a prospective investment and decide the best property to purchase. In order to obtain financing, investors can opt for either fixed or variable interest rate mortgage loans. The choice of the interest method is dependent on time, installment payment among other factors.

References

Adelaide Bank: Our rates & fees 2012, Web.

Adelaide Property Data & Trends 2011, Web.

Allied Properties Real Estate Investment Trust 2012, Web.

Choice Home Loans: life is all about Choice 2012, Web.

Frank, K 2010, Adelaide Office: Market Overview, Web.

Ratio Analysis 2012, Web.

Real Estate Investment Software: Ratio Analysis Report 2012, Web.

SAcommercialpropnews: Property Market 2012, Web.

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