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Bilinga, a Growing Suburb in Sydney Report


Introduction

Bilinga being a growing suburb in Sydney, it requires various commercial buildings to cater for the needs of the growing population. The area has a site has been identified as viable for the construction of commercial building that is compliant with environmental sustainability. This construction will involve the conversion of the existing building into commercial for rental purposes.

The rental buildings in area are in high demand as per the survey we carried out. Before construction of this out, we carried survey-involving consideration of water consumption needed and most rental units were seen to consume more than 18 giga-liters of water per annum. These buildings also produce a lot of waste material, which needs to be managed.

With this said it is obvious that pressures are likely to build and due to such pressures, businesses are being driven to show their commitment to the environment and to adopt sustainable business practices. This movement is being followed across the globe and most corporations are moving towards building corporate sustainability.

Overview of the market

Currently the world is facing downturn in economic development. Such a situation will have severe effects on the growth of industries besides badly affecting the GDP of countries. Crisis will also entail low production of goods and services apart from increasing unemployment.

The net result will be a decrease in the profit of companies. When companies face crisis and lose their profit companies, the management tend to make misappropriations in their accounts with a view of faking them for gaining the confidence of the public and shareholders.

The companies may show higher rate of profit in the balance sheet, which will be more than what actually they have earned. This is done to retain the value of shares and to maintain shareholders’ confidence. On the other hand, sometimes companies may show lower profit in their balance sheet even if they are running in better profits.

The rapid change in consumer and business confidence is a significant factor. With interest rates, falling to their lowest level in 40 years sentiment has become a mix of optimism and fear. The optimism flows from the positive impact on home affordability, with the fear coming from the constant data of falling property values and the rising rate of unemployment.

Discussions with agents indicate the greatest fear is unemployment. For property investors, the apprehension is that rising unemployment may begin to depress rents. Providing new hope for the industry the National Rental Affordability Scheme, plans to kick start the construction industry nationwide with the federal government introducing a new tax-free rebate for investors.

According to The Housing Industry Association, new home sales across Queensland declined 28% in the December quarter from the previous year with the number of private house approvals softening further since June 2008.

The residential land market is similarly fragmented with land priced under $500,000 considered the strongest performing market. This price point fits comfortably with the price bracket required for “house and land” packages.

For land that is more expensive the market is different. Whilst there are buyers for land over $550,000, sales rates are slowing. The location will need to be an area of limited supply and provide the lifestyle infrastructure the market desires including proximity to the CBD.

Accordingly, due to the lack of transactions occurring, it is very difficult to determine the market value of sites. Further, agents indicate that in the current market, potential purchasers are increasingly seeking lengthy settlement terms in order to either secure finance or to remove a degree of risk attached to the transaction by entering into a ‘subject to Development Approval’ contract.

Sites, which have holding income, are more sought after, with those, which have Development Approval viewed as the next best. This scenario is also clearly linked to the difficulty in obtaining credit. Sites without approvals or requiring a long-term hold are becoming very difficult to sell with very limited buyer interest (Lawrence, 2002).

Previously buyers for large development sites and medium term hold sites were publicly listed companies, but as they attempt to repair their balance sheets, they are in a selling mode and not buying unless it includes long settlement terms. There is little evidence that there will be any improvement in the market over 2009, with the most likely scenario being of a more difficult market.

Development variables

The cost of land for construction is estimated to $ 500,000 and construction is estimated to cost $ 1,500,000. The rental income is estimated to increase by 20% compared to a 10% worst case.

Of the ten top performing estates, eight of these are located within the northern corridor. The most notable contributor to sales this quarter was ‘Pacific Pines’, which achieved 61 sales, followed by ‘Woodlands’, which achieved 34 sales, ‘River stone Crossing’ which achieved 20 sales and ‘Jacobs Ridge’ which achieved 19 sales.

Other contributing estates included ‘Long hill Rise’ with 16 sales, ‘Coomera Waters’ with 15 sales, ‘Coomera Retreat’ with 13 sales, ‘The Observatory’ with 12 sales, ‘Highland Reserve’ with 10 sales and ‘Coomera Parklands (Stage 2)’ with 9 sales.

It should be noted that of these estates there were no sales of ‘wet’ lots, which can mainly be attributed to the high prices for the prime waterfront land, current negative market sentiment and lack of consumer confidence.

INPUT DATA:  (000s of $)       KEY OUTPUT:  (000s of $)
 Stage 1:         Stage 1:
  Facilities Costs:    Poor Scenario   Good Scenario
NPV $2,405 $4,915
land $500 IRR 35.0% 49.1%
MIRR 24.7% 31.9%
Payback 4.4 3.9
building $1,500     Disc payback 5.0 4.3
           Expected values:
management               NPV $3,660
               IRR 42.0%
Variable costs 30.0%
Fixed costs $250         Stage 2:
Fixed cost inflation rate 3.0% High Medium Low
       NPV @ Yr 0 $75,475 $56,968 $7,642
  Revenue Data: IRR 59.0% 60.7% 23.8%
MIRR 54.2% 54.8% 21.1%
Poor Demand:
  Year 4 total revenues $4,000            Expected NPV
  Revenue growth rate 3.0% Stage 1 poor demand $29,224
Stage 1 good demand $63,140
Good Demand: Combined NPV $46,182
  Year 4 total revenues $6,000
  Revenue growth rate 6.0%         Combined Stage 1 and Stage 2 NPV:
  Other Data:            Poor Stage 1:
Stage 1 + Low demand $10,047
Unexpensed dev.  costs $1,000 Stage 1 + Medium demand $59,373
Tax rate 40.0% Stage 1 + High demand $77,880
Corporate cost of capital 10.0%
Risk adjustor 3.0%            Good Stage 1:
Demand probabilities: Stage 1 + Low demand $12,558
  Poor 50.0% Stage 1 + Medium demand $61,884
  Good 50.0% Stage 1 + High demand $80,391
 Stage 2:            Expected NPV $49,842
  Cash Flow Data:
                             Net Cash Flow
   End of Year    High Demand    Med Demand     Low Demand
0 ($45,000) ($32,000) ($25,000)
1 ($45,000) ($32,000) ($25,000)
2 71,000 50,000 21,000
3 80,000 60,000 20,000
4 80,000 60,000 20,000
5 80,000 60,000 20,000
6 80,000 60,000 20,000
  Other Data:
Demand probabilities:
Poor Stage 1 Good Stage 1
  Low 60.0% 10.0%
  Medium 30.0% 30.0%
  High 10.0% 60.0%

Refer to excel file scenario and sensitivity analysis

Land and Building options

High End Luxury Living -One of three options put forward in this development approval is for a 4 storey Building comprising of one unit per floor. This particular option is a luxury development aimed at the higher end of the market.

According to local real estate juggernaut David Stringer, Bilinga is the Gold Coast’s next property hot spot. Surrounding development in the area including its neighbouring suburbs, Kirra and Coolangatta, are further proof that Bilinga is an untapped strip of coastal elegance.

Developments such as Niecon’s Nirvana are proving that consumers are still willing to pay for value, with the penthouse selling for 4.5 million. That particular development has presold 90% of the development. With this in mind having a landmark building along the Golden Four Drive strip in Bilinga as a possible option for highest and best use was a necessity.

Each sophisticated beachfront apartment will have its own uninterrupted ocean views with access to the site via Golden Four Drive. Each apartment will have 3 bedrooms, all with ensuites, a study, a theatre room, large open living with plenty of room for dining and also 2 spacious balconies.

The main balcony will be facing northeast, and the second balcony will be northwest and will accessible via the main and second bedroom. There will be floor to ceiling glass slide away doors hat give way to a wrap around balcony. This should then allow for the living areas to extend to the outdoor area. Having such an expansive living arrangement makes it as intimate or as social as the occupier wishes.

This crucial piece of infrastructure in this beach shack suburb will be finished with modern European finishes. Bamboo floorboards will be used for the flooring and morato marble will be used for the panelling and joinery. There will be a basement car park, finished in sandstone to accommodate all residents.

The stylish architectural design and the rare beachfront location enable us as developers to offer the ultimate in beachfront living with the motto of 4 levels of elegance, and only 4 metres to the beach.

There will be a 10 metre by 3-metre pool on the beachside of the site to accommodate for a more personal environment for the residents of the building. The facility will come with a small BBQ area allowing for a full functioning facility. The pool will be lined with black pebbles to attract the sun so there will be no need for heating.

  • Beautifully landscaped gardens
  • High end European finishes
  • 12 underground car parks with storage for each unit owner
  • 4 units all with GFA of 455m2
  • 90m2 of approx balcony area
  • 360m2 of basement parking
  • Total GFA approx 2200m2

In times of economic fluency, high-end market apartments are popular and this can be reiterated by the market high in 2007 with the average weighted price being more than 1 million dollars. In today’s market though, the average price is now $568,514.

This is due to the global economic crisis, leaving investors worried. It is for these reasons then that our development cannot be luxury apartments as pre sales are of the highest importance in gaining the financial credit needed to not only finish the project but also start it.

Medium Density Living

The proposed site at Bilinga offers a number of opportunities for different developments. One of which is a high-density unit block consisting of 20 units divided over the four floors. The Bilinga area offers exclusive beachfront living, with the majority of new developments focusing primarily at the luxury apartment market.

Current market research as stated above indicates that sales in this market have slowed dramatically, despite local development such as Nirvana that largely sold off plan pre the financial crisis.

One clear indicator is the market segmentation, which shows a good market under $500,000. With this in mind, this proposal is aimed at the providing affordable beachfront living in one of the Gold Coast most desirable locations.

The development will consist of two larger two-bedroom units on the Eastern beachfront, three single bedroom units behind those backing onto the communal entrance and open space and a further two, two bedroom units on the Western boundary.

This high-density complex is aimed at providing affordable housing to such demographics as, first homebuyers, single parents, young professionals, investors, and holiday letting. By focusing the development and marketing towards the needs of the lower end of the market, there are a number of benefits such as, lower construction costs, increased stability in the target market and the ability to build more units on the same block of land.

  • Mixture of owner occupier and investors
  • Light weight construction e.g. timber with brick venire
  • Low body corporate due to minimal landscaping
  • 20 underground car parks
  • 12 east facing units – GFA of 161m2 each with approx 9m2 of balcony area each
  • 8 west facing units – GFA of 133m2 each with approx 21m2 of balcony area each
  • In total 749 m2 per level
  • 600m2 of basement parking
  • Total GFA approx 3600m2

Medium Density Living- A strictly medium density approach on the subject site consisting of four apartments per level with beach views from both east and west apartments. The eastern side apartments consist of a gross floor area of 120m2 and uninterrupted views of the ocean.

The western side apartments consist of 130m2 GFA with views out into the ocean from only the second-fourth floors, with the first floor having views into the gardens on site. Finishes will be of general standard with minimal carpet and tiles and floating wooden floor throughout.

Underground parking for 24 cars, 1 for each unit and 8 general parks will be allocated directly underneath the ground floor. By implementing this approach this option is maximising return on investment and making it possible to achieve the highest and best use through ocean views, substantial secure parking and natural ventilating sea breezes.

Our market commentary shows the lower two thirds of the market are selling with still a relatively strong demand within the lower bracket.

This development in Bilinga will cater for the owner-occupiers and investors with 31.6% of dwellings fully owned and 52.7% rented. According to real estate specialist DJ Stringer of DJ Stringer Real Estate, keeping all units under 150m2 and 2bed 2 beds enables us as developers to sell a product that is well in demand within the Bilinga area.

DJ Stringer also commented on as advertisement within the weekend bulletin on February the 14th 2009 stating, huge future public infrastructure spending, increased private developments, council works along the parks and beaches and a general revitalisation of the Bilinga, Tugun and Kirra area sparking 30 phone calls over that weekend from interested buyers.

  • 24 underground car parks and storage
  • Ocean views from all apartments
  • Manicured gardens
  • Sustainable features
  • 8 east facing units, 120m2 each
  • 8 west facing units, 130m2 each
  • Floor by floor GFA 535m2
  • 720m2 of basement parking
  • Total GFA approx 2880m2

Competing against the high end development market of Kirra Surf, Kirra Wave, Kirra Pearl and Nirvana gives us an advantage in struggling times like these as demand for the lower tiers of property are still positively demanded. A construction project underway in Bilinga only 1 kilometer away from our site is ‘La Plage’, an up market development with prices ranging from $3.5million to $5.5million, which has struggled to sell.

Due to the above market commentary, analysis and option feasibilities, option 3 seems the viable option and further due diligence will be conducted with this option.

Sensitivity Analysis

Stage 1:
Poor Scenario Good Scenario
NPV $2,405 $4,915
IRR 35.0% 49.1%
MIRR 24.7% 31.9%
Payback 4.4 3.9
Disc payback 5.0 4.3

Sustainable Development Considerations

To attain a sustainable direction, many resources are available to organizations today. The problem is that most organizations tend not to take advantage of this readily available guidance. A survey suggests that there are roughly about 30% organizations that are unaware of the availability of local resources.

The amazing fact is that around two thirds of such organizations wish to switch to alternate energy but they unable to do so because they think that there is no one to help or guide them.

The support that they require is basically that of grants, technical assistance, or just simply the access to more information. If we take a look at the access to more information, there are chances that the commercial property sector might gain some knowledge as how to improve their current structures in order to go green.

Because of the rise in the air and sea, temperatures it can be see that global warming is having its toll. Greenhouse gases are believed to be the cause of all of these changes.

If we take a look at the levels of greenhouse gases being emitted from Australia, we can see that these levels are very high on per capita basis. The reason for it being so high is that Australians heavily rely on coal-fired power stations and also because of the manufacturing and production sector (Eldon Enger 2009).

Now when we take a look at the commercial properties, we can see that they are the major users of electricity. The usage of electricity is around 58 petajoule per annum and the usage of gas, which is used as an alternate fuel, is around 12 petajoule per annum. This shows that a major contribution in Australia is being done due to the usage of electricity, which is produced by coal, and by the usage of gas as an alternate fuel source.

Therefore, we can say that one of the challenges faced by the existing commercial property sector is to reduce the consumption of electricity. This will in turn reduce significantly the amount of greenhouse gases being emitted. However, there is an added benefit to this as well and that benefit is that this will also reduce the operating costs in these buildings.

In order to do this, organizations would need to use certain tools in order to check the performance of their buildings. One the tool that is being used by a significant number of Australian corporations is the Australian Building Greenhouse Rating scheme.

By opting into this scheme, organizations are audited and then rated. The buildings are rated on a scale of 1 to 5, where one is the poor level of performance. This can also be an added benefit; reason being that most of the tenants that are coming to occupy buildings today tend to take a look at the property rating before looking to sign an agreement.

This again brings about certain challenges to the table. Now because such ratings are present there are many changes that the property owner has to implement.

This is rather difficult because of the fact that electricity consumption needs to be reduced without affecting the performance of the building. In order to reduce the consumption of electricity, there are a couple of changes that have to be implemented which include ensuring that the current business systems are properly tuned; there is also a possibility that certain energy efficient systems be installed, replacing the old ones.

The major buildings present in Australia generate approximately 110,000 tons of water per annum, out of which 13,000 tons alone relates to Sydney. There are many projects that are being proposed to the commercial property industry, each carrying its own challenges. Some of the proposals include recycling of paper, glass, cardboard, plastic, food, and aluminum.

A survey suggests that when a large commercial building is considered, it only needs to send off 25% of its waste materials to the landfill. The remaining percentage can be easily recycled by the implementation of recycling programs.

Though setting up the plants of the recycling plants in the existing buildings might be a challenge there are many benefits attached to it. There is one benefit of rebates that is included by the installation of such plants.

This concept is basically related to the process of building buildings by the implementation of a complete life-cycle model. The problem here is that when we take a look at this, we can see that there are many steps, which have to be skipped; the reason being that the buildings are already constructed, and operational (Cicchetti 2009).

We can see that new technologies are being developed constantly so that there are more efficient buildings being constructed and renovated but the thing is that the best building being built is that which is new (Feirer and Louis, 2004).

Results and conclusions

From the analysis, excel analysis about the construction of the commercial building. The factors not described in the numbers are the salvage land value as well as the buildings. It does not matter that the equipment will face substantial depreciation because they are going to be accounted for in the computation of the project.

The net present value of a project represents how profitable it will be for the company by using its future cash flow and discounting its value. If its value is bigger than the initial investment, then it is a good investment.

The length of years used to calculate the net present value however can affect the NPV that is why it is also of critical importance to determine the correct length of years to use in the analysis. In this case, the commercial investment project seems to be unprofitable from the NPV point of calculation but the analysis can change greatly simply by taking into consideration other factors.

It is indeed lower than the 2 million of initial capital investment but the salvage value of land, building and the equipments have not been incorporated in this analysis, hence, it is a good idea to take a look at the whole situation instead of just looking at the numbers alone(Arnold, 2007).

The figures used above do not include the salvage values and the costs included the additional in its computation to determine the worst-case scenario.

Obviously, the situation is even worse than the expected NPV because the expected NPV is already lower than the initial capital outlay and this one is even lower than that. The only flaw in this analysis would be the length of time used to determine the computation (Jones, 2001).

The worst-case scenario helps to assess the risk because they know how much they stand to lose in the very worst event. In this case, actually, the NPV of the worst-case scenario is very close to the initial capital outlay, which is an extremely good sign. The capital can then be easily recovered and a very small change in the situation just might turn the project profitable and not a total disaster.

References

Arnold, G. (2007). Essentials of Corporate Financial Management. London: Financial Times / Prentice Hall.

Cicchetti, C. (2009, May). Going Green and Getting Regulation Right: A Primer on Energy Efficiency. Public Utilies Reports, 2, 17-19

Feirer, M.D., & Louis, J., (2004). Glencoe Carpentry & Building Construction. Peoria: McGraw-Hill.

Jones, C. (2001). Investments: Analysis and Management. London: Wiley, John & Sons, Inc.

Lawrence, T. (2002). Home Building Pitfalls: Insider’s Guide to Getting the Quality New Home You Deserve. Las Vegas: New Community.

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Hodges, Elvis. "Bilinga, a Growing Suburb in Sydney." IvyPanda (blog), August 6, 2019. https://ivypanda.com/essays/residual-analysis/.

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Hodges, Elvis. 2019. "Bilinga, a Growing Suburb in Sydney." IvyPanda (blog), August 6, 2019. https://ivypanda.com/essays/residual-analysis/.

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Hodges, E. (2019) 'Bilinga, a Growing Suburb in Sydney'. IvyPanda, 6 August.

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