Tuitorial - Valuation - Residual Method ( Disccussion Only )

RESIDUAL & PROFIT METHOD

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1.

A 12-acre land in Kajang has recently been granted with planning permission for residential development. The components of development consist the following :- Types of development units Total Selling Price [RM/unit] 1. 2-storey terrace house 200 345,000 2. Apartment 120 180,000 3. 2-storey shophouses 8 420,000 The followings estimated costs are to be considered in your residual valuation. i. Building construction cost Types of development Construction Costs [RM/unit] a. 2-storey terrace house 86,250 b. Apartment 45,000 c. 2-storey shophouses 105,000 ii. The cost of preliminary works @ RM160,000.00 per acre iii. Professional fees @ 10.5% of items (i) & (ii) iv. Finance costs cover item (i), (ii), (iii), (v) & (vi) for a period of 2 years @ 8% interest rate v. Contingencies @ 5% of GDV vi. Marketing & Promotional Costs @ 2.5% of GDV vii. Administration and Management cost for 2 years @ RM70,000 per month The developer targets a profit margin at 25% of Gross Development Value  and interest rate @ 8% per annum is applicable throughout the development period.   The development is expected to be completed in 2 years. Using residual method, ascertain the market value of the land taking into account the planning permission granted.  Assume the development on the land is completed and in accordance to the construction schedule. Cost Unit i) Land Land 160,000 x 12 = 1,920,000 1,920,000 ii ) Buiding Terrace House 86,250 x 200 = 17,250,000 Apartment 45,000 x 120 = 5,400,000 Shop 105,000 x 8 = 840,000 23,490,000 iii )GDV Terrace House 345,000 x 200 = 69,000,000 Apartment 180,000 x 120 = 21,600,000 Shop 420,000 x 8 = 3,360,000 93,960,000 iv) Profesional Fee  10.5% Buiding Cost ii)  23,490,000 x 10.5% = 2,466,450 10.5% of Land Cost i) 1,920,000 x 10.5% = 201,600 2,668,050 v) Contigentcy Contigency 93,960,000 x 5.0% = 4,698,000 4,698,000 vii) Marketing & Marketing & Promotion 93,960,000 x 2.5% = 2,349,000 Promotion 2,349,000 viii) Other Admin & Management  70,000 x 24 = 1,680,000 RM 70 / month 2 years 1,680,000 ix) Financial  Building ii) 23,490,000 x 16.0% = 3,758,400 at 8% per annum Land i) 1,920,000 x 16.0% = 307,200 or at 16% for 2 year Profesional fee iv) 2,668,050 x 16.0% = 426,888 Contigencies v) 4,698,000 x 16.0% = 751,680 Admin & Management viii) 1,680,000 x 16.0% = 268,800 5,512,968 x) Targeted Profit 25% of GDV 93,960,000 x 25.0% = 23,490,000 23,490,000 xii ) GDC Land i) 1,920,000 Building ii) 23,490,000 Profesional iv) 2,668,050 Finance ix) 5,512,968 Other viii) 1,680,000 Contigency v) 4,698,000 Marketing & Promotion vii) + 2,349,000 42,318,018 xiii) Residue Value GDV iii) 93,960,000 less ( GDC ) xii) -42,318,018 less ( Targeted Profit ) x) -23,490,000 28,151,982 Present Value 1 / ( 1 + I ) ^ n n = 2 = 1 / ( 1 + 0.08 ) ^ 2 i = 8% = 1 / 1.08^2 = 1 / 1.1664 0.85733882 Land Value Residue Value x PV 28,151,982 x 0.85734 = 24,135,787 24,135,787

2.

A three-storey building running as a private maternity clinic, generates an annual income of RM9,500,000. The patient consultation fee is RM450,000 a year. From the clinics account, we have extracted the followings detail :- Wages and salary  RM400,000 Building premium and maintenance RM50,000 Kitchen expenses RM300,000 Office expenses RM120,000 Laundry and cleaning RM60,000 Miscellaneous expenses RM35,000 Stock  RM50,000 Equipment and furniture RM1,500,000 Cash in Hand RM18,000 Assume the depreciation on equipment and furniture @ 30% and interest on capital @ 18%. The remuneration for risk and rates is estimated at 55%. Using profit method, CALCULATE the rental value of the resort for rating purposes.

	Maternity Clinic Annal Income							9,500,000
	Consultation Fees							450,000
	gross receipts							9,950,000
Less	purchase of stock							0
	gross profit							9,950,000
Less	Working and Misc Exp
	wages & Salary					400,000
	kitchen expenses					300,000
	office expenses					120,000
	laundry & cleaning					60,000
	miscellaneous					35,000		-915,000
	trading profit							9,035,000
less	buiding main & insurance					50,000		-50,000
	net profit							8,985,000
	equipment & furniture
less	amount depreciate	1,500,000	x	0.3	=	450,000
	net value					1,050,000
less	interest on capital
	stock	50,000
	equipment & furniture	1,050,000
	cash in hand	18,000
		1,118,000	x	0.18	=	201,240		-201,240
	divisible balance ( net profit )							8,783,760
less	tenants share @55%	8,783,760	x	0.55	=	4,831,068		-4,831,068
	rental value ( gross )							3,952,692
less	out going
	a) repair					0
	b) property taxes					0
	c) insurance					0
	d) maintenance fees					0
	e) management fees					0
						0		0
	net rental							3,952,692
	YP	1	/	0.08	=	12.5
	Capital Value
	Net Rental x YP	3,952,692	X	12.5	=	49,408,650