Evaluation of Single & Portfolio of Income Producing Properties Harvard Case Solution & Analysis

Introduction

            This report attempts to perform an analysis and valuation for the single income producing property and portfolio income producing property. The analysis and the valuation of the properties are based upon the real data of the real estate markets. The country of origin for all the properties is United States whereas, for the purpose of the valuation of the portfolio properties the assumptions relate to four states of United States which are California, Florida, Massachusetts and Illinois.

            As the time is moving ahead, the real estate investors’ preferences for investing in particular single property or group of properties is changing rapidly. There are wide ranges of factors that are consistently changing from time to time and this is shaping the real estate industry of United States. In such dynamic conditions the real estate investors seek to maximize their returns and minimize their overall risks. As the time goes on there would be many significant changes taking place in the real estate market and the preferences of the shareholders would change significantly. This report attempts to analyze how the real estate market is likely to change in future years and post 2020 and what type of the real estate investors are more likely to dominate the real estate market.

            The valuation for the properties has been performed in this report based upon the market rental growth rates, expense growth rates, capitalization rates, terminal CAP rates, loan to value ratios and the required rates of returns for investment. Once the rate of return for each of the models, which is model 1 for the single property and the model 2 for the portfolio property, has been calculated, then a set of probabilities has been calculated using the excel functions in order to identify the key risk factors inherent in the valuation of each of the properties and calculating the chances of losing the investment in nominal terms.

Description of Distributions

            The distributions that have been used in the analysis of both the models are the normal distributions. The historical CAP rates, vacancy rates and the growth in the net operating income which in both the models is also assumed to be the growth in the rental income has been used. The normal distribution has been used for both the models because most of the variables are normally distributed such as the cap rates and the vacancy rates in this case(Quine, 1993).

            Another reason for using the normal distribution in the calculation of the different variables is that the normal distribution is the easiest of all to work with and computations become quite easy when using normal distributions in the calculations(Wichura, 1988). Furthermore, regarding the correlation of the variables, it has been assumed that the historical correlation between the vacancy rates and the rental growth rates would also continue in the future as well. The historical correlation has also been calculated using the data analysis function in the excel spreadsheet. The historical correlation is strong and negative. Therefore, this correlation would continue to follow over the holding period of the property.

            Based upon the normal distribution, which has been used for all the uncertain variables in the model and the historical correlations between the vacancy rates and the rental growth rates, the valuation of both the models and their respective analysis has been performed(Tenenbein, 1981). The probability distribution and the standard deviation for the cap rates, vacancy rates, terminal cap rate and the rental growth rate for model 1 and model 2 have been defined in their respective sections one by one.

Evaluation of Single & Portfolio of Income Producing Properties Case Solution

Results and Discussion

            The valuation and the analysis have been performed one by one for the single income producing property and the portfolio of income producing properties. The results, analysis, valuation, risks and the probabilities of uncertainly for each of the two models are discussed and interpreted below:

Single Income Producing Property

            First of all, in order to perform the valuation of the single income producing property, the location of origin as an investor has been assumed to be in the California state of United States. All the input assumptions have been used considering the real estate market for the office building in California. The time horizon of the investment is 5 years and the loan to value ratio of 65% has been used to finance the real estate property........................

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