MARKET STUDY& FINANCIAL ANALYSIS

MARKET STUDY AND FINANCIAL ANALYSIS

INTRODUCTION

PURPOSE 

• To undertake a demand analysis for the range of uses provided by proposed development

• To undertake an assessment on the products marketability and feasibility

• To advice on the financial and marketability prospects for each components of development (pricing, phasing, strategy)

 

Extract From Wikipedia, the free encyclopedia

• A Market analysis is a documented investigation of a Market that is used to inform….

• Supply and demand - The price of a product is determined by a balance between production at each price and the desires of those with purchasing power at each price.

• Not all managers are asked to conduct a market analysis, but all managers must make decisions using market analysis data and understand how the data was derived.

WHY NEED MARKET STUDY?

1.Parameters for commercial development; project proponents

2.Assist & Describe kind of Development – mix, quantity, quality, potential risks, market segments, market trend (upwards or downwards movements of market during a period of time),competition

3. Bridging finance (to seek/convince bankers(potentials on loans, over-draft facilities)

4. Scale of development – high risk, large investment & area (calculated risk, minimize & strategized risk)

5. New to Market – new product: e.g. second homes for foreigners, green development, waterfront development, auto-hub, auto-city, TOD, Marine Resort, theme park, time-sharing, condo-tell, retiree homestead, etc.

6. Required by authority – LCP (part of LCP)

7. need certain answer - When there is a problem, at stages of phasing (review, re-strategized)

8. Informed Decision - not guess work, but calculated risk

9. Marketing strategies – identify client and client’s preferences, incentives, sale by sale, lease? leaseback? BOT, BLT, built but not sell (owner-occupier), business management (MC) Definitions used in property market.doc

Market analysis begins by asking:-

What precisely is the market?

Domestic Market Profile

Local Market Potential

Overseas Market Profile

Overseas Market Potential

Mix

1. Is the market growing, shrinking or staying the same; (market condition)

2. Is it worth your while? Invest in something else? Opportunity cost.

3. What is the market trend; past, current or projected demand? How many units can you expect to sell? (take-up rate, absorption rate, overhang)

4. What is the demographic characteristic of the customers? (origin, income, age group)

Continue asking…

Continue…

5.What competition exists in the market? (SWOT analysis)

6. Can you establish the market ‘niche’ – pricing, design, environment, concept, safety, security etc.

7. Is your project location likely to affect market – demand area, access, site constraints, close to employment opportunities, town center, etc.

8. Government policies, incentives/disincentives?, tax, loan facilities, interest rates, budget allocation, development plans, road proposals etc.)

9. Other relevant Questions: Company Organizational structure, Board of Directors, capital etc.

You may analyze :

TYPES OF ANALYSIS

1.Spatial Analysis

2.Demand Analysis

3.Supply Analysis

4.Financial Analysis

1. Spatial Analysis

• Viability of site – “highest and best use concept”- premier location, access considerations (major routes, airports, public facilities etc.) capitalizing inherent site qualities (land form, natural features etc.

• Site attributes in relation to existing neighbors (land use, density, elevation of major access, sharing of infrastructure facilities (?), urban parks, employment areas, major commercial outlets etc.)

2. Demand Analysis Definition:

Study of sales generated by a good or service to determine the reasons for its success or failure, and how its sales performance can be improved.

1. Demography – country of origin (foreign, local, second homes, property investment) - Market segment, capture Rate

• D=Sum (N1 x R1) (D=demand, N=Population of segment, R=rate of consumption of segment) –

2. Socio-economic profile – household characteristics, income, age structure, household size, employment, education )

3. Behavior & Cultural beliefs – Perception taste & lifestyle, resale value, quality of community, cultural values - beliefs, taboo community facilities (schools)

4. Market Factors – inflation, interest rate, per capital income

5. Product characteristics – location, product concept and design theme, environment, management (MC, security and safety), support public amenities. (what is the ‘niche’ of the product)

6. Volume of patronization -

absorption rate, take-up rate, cost recovery period, rate of overhang, rental value

7. Added Value

incentives (sale by sale, loan facilities, low interest, one stop agency, furnished homes, flexible mortgage facilities)

3. Supply Analysis - MICRO MARKET

Economic forces fundamental to the price mechanism in a free market system. They determine the price of a good or service offered, ( and are in turn determined by the price obtainable)…..

1. Review on supply and demands – (of industry, housing, retails) in district under study; take-up rate, overhang, empty premises, vacancy rate, rental value)

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2. Existing Stock & Future Supply (location)

- Existing Stock

- Scheme under construction

- Approved Scheme

- Transaction Price,

- Rental value

- Vacancy (absorption rate)

- Household formation, migration pattern etc

SOURCE OF INFORMATION/DATA

• Ministry of Finance• Housing Developers Association• Construction Industry Development Board (CIDB)• PWD• Market Research/survey• Statistics Dept, Development Plans• WTW Property Market ReportWTW Property Market Report. WTW Property Market Report 2008. WTW CEO Opinion ... 2004 Malaysian Property Market Outlook. 2003 Malaysian Property Market Outlook ...www.wtwy.com/report/annualReport.htm - Cached

• JPPH : Jabatan Penilaian dan Perkhidmatan HartaProperty Market Status Report Q1 2009. New Launches Tables Q1 2009 ... Property Market Status Report, Third Quarter Q3 2007. Property Market Status Report, ...Etc.

4. – Financial Analysis

• Assessment of the (1) effectiveness with which funds (investment and debt) are employed in a firm, (2) efficiency and profitability of its operations, and (3) value and safety of debtors' claims against the firm's assets. It employs techniques such as 'funds flow analysis' and financial ratios to understand the problems and opportunities inherent in an investment or financing decision.

• ROI (Return on Investment), % of return, IRR (with discounted value)• GDV (Gross Dev. Value)• GDC (Gross Dev. Cost)• Cash-flows (cumulative, by phases)• Recovery Period

FINANCIAL ANALYSIS

Preliminary investigation especially when facing complex problem or huge investments – to obtain overview of problem and to assess feasible solutions prior to committing substantial resources to a project. Together with market analysis it provides an analysis of project viability or economic return.

Several factors have to examine;

1. Start-up Costs – cost incurred in starting up business including ‘capital goods’(land, buildings, equipments etc. You may have to borrow money from lending institutions to cover these costs).

2. Operating Costs

Outgoing costs such as rents, wages, overheads, interest and principle payments.

3. Revenue Projections

How will you price your good/services, assess the estimated revenue (monthly, yearly)

4. Sources of Financing

If business require to borrow money, you need to reach the potential lending sources.

5. Profitability Analysis

This is the bottom line. Will it break even, lose money or make profit. Can you improve the bottom line?

Continue..

COSTS ITEMS A PRELIMINARY COSTS (require current information)

a.Land Cost (land premium, land titling and related costs)b.Site Clearance (RM 45000/ac)

B CONSTRUCTION COSTSa.Residential (varies – RM 70-RM150/sq.ft)b.Industry (RM 50- RM 60/ft)c.Commercial (RM 50-RM 150/ft) etc.

C INFRASTRUCTURE AND UTILITIES a. Sub-station - (RM 1000/ac)b. Sewerage (STP) - (RM 25000/ac)c. Water Tank - (RM 3000/ac)d. Water & Fire Hydrant Reticulation (RM 15000/ac)e. Earthworks (RM 3/sq.ft)f. Telecom (RM 1300/ac)g. Road & Drainage (RM 45000/ac)h. Electricity (RM 15000/ac)i. Detention Pond (RM 1000/ac)j. Access Road (RM 2000/ac)

D LANDSCAPE WORKS (0.6% of Landscape costs)a. Master Planb. Working Drawingc. Supervision

E DEVELOPMENT CHARGESa.Land Conversion fee (RM)b.Sub-division fee (RM)c.Contributions to local Authority - Plan Approval (RM) - Building Plan Fee (RM ) - Planning Approval Charges (RM) - Contribution Earthworks (RM 700) - Contribution Drainage (RM 1100) - Contribution to water (2800/ac)

F CONSULTATION & PROFESSIONAL FEESa.Town Planner (RM 400/acre)b.Architect (3-7% of construction cost)c.Land Surveyor (RM 4/ft)d.QSe.Engineers (C&S, M&E) (RM 2 – 4% of development cost)

G LEGAL FEES (1% of Land Costs)a.Sale & Purchase Documentations

H MANAGEMENT COSTS (2% of A+B)

I MARKETING & ADVITESEMENT COSTS (RM 1.5% of GDC)

J CONTIGENCIES (5% of A+B)

K INTEREST ON LOANS (1/3 X (A+B+C+D) X CURRENT INTEREST RATE

GROSS DEVELOPMENT COST (GDC)

• Estimated total development costs incurred; inclusive of preliminary costs, Construction Costs, Infrastructure & utility Costs, Legal Fees, Management costs etc.

• Is the estimated total gross inflow from sales of properties; Proceeds of sales - value of transacted property (saleable units/spaces) from the development

Gross Development Value (GDV)

RETURN ON INVESTMENT (ROI)

GDV = 6 000 000GDC = 5 000 000ROI = 1 000 000/5 000 000 x 100

(GDV-GDC)/GDC x 100

PERCENTAGE OF PROFIT FROM INVESTMENT= 20%

Discounted Cash Flow – means return of investment or flow of money according to phases (year) of the investment, (big project takes time)

BUT money has time value. The value of money has to be discounted over time (reduced because of inflation, value devaluate). You can see it from another perspective - if money invested in bank (not on the development), the return of the money is - capital + interest.

Therefore you must take account of those factors in calculating the return of the investment.

Discounted cash flow is the value of investment return is being discounted or reduced so you can really see the REAL return.

Discounted Cash-Flows

‘ Discounting the Cash Flow – allowance for the Time Value of Money’.

Value of money RM 100 now is different when money put as deposit in bank (say 6% interest). The value in 12 months time as deposit in bank will be RM 106. In another words RM 100 is the ‘present value’ of RM 106 in 12 months time.

Formula using compound interest: A.(1 + r)N

A : Amount Deposit

r : Annual rate

N: Number of years for which A is left deposited

If You Invest RM 100 now, how much is worth in 1 year’s time?

X = RM 100.(1 + 0.06)1 = RM 100 + RM 6 = RM 106

Similarly if invested for 2 years:

RM 100.(1 + 0.06)(1 + 0.06) = RM 100 (1 + 0.06)2 = RM 112.36

Similarly if the Formula is switched around the amount to be invested:

For a return RM 106 (after 1 year of investing), how much money you need to invest now?

Y = RM 106/(1 + 0.06) = RM 100

For an investment with a return RM 112.36 received in 2 years time, the discounted value is only equal to:

RM 100 now

“I still don’t understand “ @6% interest rate/annum for 2 year period of investing)

100 (1+0.06)(1+0.06)= 100 (1.06)(1.06)= 100(1.1236)= RM 112.36

Reverse: after 2 years of investing with 6% interest rate/annum

RM 112.36(1+0.06)(1.06)= RM112.36 1.126= RM 100

Thus: The terminal value in 2 years time of RM 100 invested now is RM 112.36. Whilst the Present Value of RM 112.36 received in 2 years time is RM 100.

Therefore:

In the calculation of terminal value, the money is ‘compounded’ forward through time.

In the calculation of Present Value, the amount of money is ‘discounted’ backward through time.

Deficit Present Value Factor

1 - 0.94 2 - 0.893 - 0.844 - 0.795 - 0.756 - 0.70

7 - 0.67 8 - 0.639 - 0.5910 - 0.5611 - 0.5312 - 0.5013 - 0.4714 - 0.4415 - 0.42

NPV Table 1: Discount Factor Chart for Use in Net Present Value Calculations: Interest Rates 1%-10%

YearInterest Rate per Year

1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909

2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826

3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751

4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683

5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564

7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513

8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467

9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424

10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386

11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350

12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319

13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290

14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263

15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239

16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218

17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198

18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180

19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164

20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

21 0.811 0.660 0.538 0.439 0.359 0.294 0.242 0.199 0.164 0.135

22 0.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 0.150 0.123

23 0.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 0.138 0.112

24 0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102

25 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092

26 0.772 0.598 0.464 0.361 0.281 0.220 0.172 0.135 0.106 0.084

27 0.764 0.586 0.450 0.347 0.268 0.207 0.161 0.125 0.098 0.076

28 0.757 0.574 0.437 0.333 0.255 0.196 0.150 0.116 0.090 0.069

29 0.749 0.563 0.424 0.321 0.243 0.185 0.141 0.107 0.082 0.063

30 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057

NPV Chart 2: Discount Factor Chart for Use in Net Present Value Calculations: Interest Rates 11%-20%

YearInterest Rate per Year

11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833

2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694

3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579

4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482

5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335

7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279

8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233

9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194

10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162

11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135

12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112

13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093

14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078

15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065

16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054

17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045

18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038

19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031

20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

21 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022

22 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018

23 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015

Project 1 Project 2

Year Cash Flow Year Cash Flow

0 - RM 500 0 - RM 400

1 + RM 200 1 - RM 600

2 + RM 200 2 + RM 400

3 + RM 200 3 + RM 250

Net value + RM 100 Net value - RM 350

Example of calculating cash flow without discounted value (time value of the money)

Project 1 is worth investing because on capital outlay of RM 500, the return is RM 600 i.e (positive) net value of RM 100

Project 2 is not worthwhile, because on the capital outlay of RM 1000, the return is RM 650 or (negative) net value of RM 350

(However in the above case the time value of money is not taken into account)

Year Cash Flow x Present Value Factor

= = Present Value Cash Flow

0 -RM 500

(invest – flow out)

x (1+0.08) 0 = = -RM 500

1 +RM 200 x (1 + 0.08) -1 = +RM200x0.9259 = +RM 185.18

2 +RM 200 x (1 + 0.08) -2 = +RM 200x0.8573 = +RM 171.46

3 +RM 200

(1-3 RM600 flow in)

x (1 + 0.08) -3 = +RM 200x0.7938

(sum flow in)

= +RM 158.76

(RM 515.4)

Using discount factor - Project 1(refer Table 1 discount factor for NPV)

Net Present Value +RM 15.40

RM 2001.08= RM 185.18 or

RM 200 x 0.9259= RM 185.18

Gross Development Value & Cost (by phase)

PHASE GROSS DEVELOPMENT VALUE (RM)

GROSS DEV. COST (RM)

Phase 1

Phase 2

Phase 3

Phase 4

i. Internal Rate of Return (IRR)

IRR is calculated from the return of each invested money. If the return exceeds 10%, it means the proposed development is viable. Usually a figure of >15% is preferred.

i. Calculate Gross Development Value

ii. Calculate Gross Development Cost

iii. Calculate Benefits ( i – ii)

iv. Calculate Ratio of Benefits/Cost

v. The ratio between benefits and costs shows the profit margin. An investment is considered profitable if the ratio is >1.

vi. IRR = BENEFITS/COSTS X 100%

Indicator of Project Viability

Definitions:Net Benefits Net benefits are the difference between the benefits of the project and the associated costs used to generate those benefits. net benefits = [benefits – costs] (with or without tax)

Time Period The Time Period to estimate the Benefits and Costs varies, creating some complexity in the interpretation of the results. Some companies use one year, approving only those projects that are able to recover their value in the first year of operations. Other companies determine the final ROI of the investment according to discounted cash flows using the hurdle rate of the activity

• Marketing Strategies

A process that allow an organization to concentrate the limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage. Should be centered around

the key concept of customer satisfaction.

1.Product strategy :

• Housing – design, quality construction, transport facilities, environment, communal facilities, job opportunities, choices, etc.

• Commercial : choices & variety, environment (corporate park), community business center, location & access, transport facilities etc.

• Industrial : types, infrastructure, location & access, environment, workers quarters, sub-community facilities, transportation

2. Selling Strategy:• Sell by building• Sell by lot/parcel• Sell by floor area• Rent by floor space• Discount• Sale by sale• Loan facilities• Interest rate• BOT, BLT, Lease and Lease Back• Time sharing

3. Pricing Strategy Pricing.doc

• Competitive pricing

4. Promotion Strategy• Multi media, digital marketing• Brochure/Pamphlet• Model building (actual, scale)• Advertisement Board• Launching & open day• Counter service (supermarket)• Direct Marketing; By Invitation – target consumer market• Personal sale

SWOT ANALYSIS(decision making tool often used by focus group)

i.Strength – quality, demand, price, good theme and concept, good design, experience, good neighbor, surrounding facilities, company reputation.

ii.Weaknesses – over-supply/over heated market, costly, poor location, poor linkages, site constraints, new company, pollution, flooding etc.

iii.Opportunity – short-supply, new design, location advantages, good neighbor.

iv.Threat – nearby development, policy change, economic uncertainty.

SWOT analysis may complement Market analysis scenarios

Example of Report FormatMARKET STUDY GUIDE ARIZONA.doc

CONTENTS OF MARKET STUDY

• Executive summary

• T.O.R

Basis of Analysis

• Market Gap Gap analysis.doc

• Market Segment

• Market Scenario & Direction

• Physical, Economic & Financial Policies affecting development and investment decisions

• Financial Accessibility

• Market Requirement

• Marketing Strategies

Suplementary

WHAT PEOPLE SAY

Key indicators used by Property Market Report Ministry of Finance

• SUPPLY (existing, approved, new scheme launched, under construction, completed)

• DEMAND (take-up rate, sale performance, location)• PROPERTY OVERHANG• UNSOLD UNDER CONSTRUCTION PROPERTY• UNSOLD NOT CONSTRUCTED PROPERTY• VACANCY IN COMMERCIAL BUILDINGS

(vacancy rate – total unoccupied divided by total net letable area of commercial building)

By Property Valuer• Similar in aspects as above but more sensitive towards

government’s vision, policies and commitments on economic endeavors

– Direct involvement/initiatives/commitment of central government

- Major infrastructure development within the fiscal years (5 yr. plan)

- Incentives/facilities on loans, interest rate

- while still highlighting observation on market trend of local demands (take-up rate, property overhang, vacancy rate, pricing).

- Trend of global players citing key players of various property type in various locations o cities/large towns.

Key indicators used by Property Market Valuer

• National Policy and commitment (Twin Engine Growth: Domestic and Foreign)

• International property investment hub: relax property ruling (Real Property Gains Tax - RPGT, Speedy approvals, reduction of stamp duty, easier foreign ownership (before 30% RPGT if property disposed less than 5 years), higher withdrawal limit from EPF (to service mortgage payment).

- Currency standing (undervalued)

- Return of domestic demand

- Removal of limits on number of residential or commercial properties

- Loans availability, gentle interest

- Property >RM 250,000 before need prior approval from Foreign Investment Committee

• National Policy

• Growth Regions, corridors (infrastructure commitments of central govt. spur industrial and property developments, foreign investments).

• Market segments (Higher-end markets in growth regions)

• Malaysia as second homes (foreign & neighboring markets of Singapore, Korea, China, Japan)

• Sustainable development concept (green, high-tech, bio-tech

• Land capability - Food security (good agriculture land)• Land conservation (high land, steep slopes, water

catchment areas)• Incentives

Common complaints

• Not meeting consumer taste, life style and location of job market

• Unimaginative design, conventional approaches in township development;

• Concentrating too much on popular housing (market segment not fully explored)

• public safety and security, traditional role of LA,

• ill-responsible developers

END