Appraisal for SRF plaza complex project

Realizing that the demand for real estate is very high, SRF Company considered the plan changing the land use purpose to invest in a SRF Plaza project which is a complex including reside

TRƯỜ NG ĐẠI HỌC MỞ TP HCM UNIVERSITÉ LIBRE DE BRUXELLES

MBAVB4

ồn Th Thanh Thúy

APPRAISAL FOR SRF PLAZA COMPLEX PROJECT

MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION

(PART-TIME)

Ho Chi Minh City

(2012)

Signature

oàn Th Thanh Thúy

ABSTRACT

The program to relocate the urban polluting enterprises and the plans to tackle thoroughly the polluting facilities into the industrial parks, industrial clusters of the Government are being implemented, and SRF Company is one of the companies affected by this policy Therefore, SRF Company must relocate their entire operations on that land into the industrial areas whether the land lease contract through 2012 or not

To encourage the relocation of enterprises, the Prime Minister has issued regulations that the enterprises may change the Land Use Purpose to continue to invest if this location is suitable for land planning and corporate business functions are suitable for investment projects With the suitable plan, the State will accept and charge the land price at the state price, not at the market price Realizing that the demand for real estate is very high, SRF Company considered the plan changing the land use purpose to invest in a SRF Plaza project which is a complex including residential categories and commercial center The proposed development has a total land area of 12,573m2 Upon completion, the project will consist of a total GFA of 87,761m2 of which 78,010m2 is identified for the residential component, 9,751m2 is reserved for the retail component and the balance will serve as parking The subject property will have an overall plot ratio of 7 whilst the total site coverage is 39%, and a maximum height restriction of 18 storeys

To affirm certainty the level of efficiency, feasibility of project, SRF Company need to evaluate and assess the financial feasibility of the SRF Plaza project to confirm that the changing of current land use purpose to invest in the SRF Plaza project is effective or not

After calculating and analyzing the financial structure for SRF Plaza, with the results of NPV> 0, IRR = 50% and BCR > 1, that means the SRF Plaza project is a financially feasible project Furthermore, after performing sensitivity analyzing with the input variables concerned, the results are: the apartment selling price affected to the decision of the investor, but it is not a major concern, the apartment selling price of 12.1million/m2 for grade B apartment to get NPV

> 0 and IRR > MARR is entirely possible The commercial leasing price has absolutely no affect to the decision of the investor as analyzed above, even if the commercial leasing price is lowest then the NPV of investor is also positive and IRR > MARR On the issue of construction cost, with the increase of construction cost by 37%, NPV of the investor is zero and the nominal IRR of the investor is equal to MARR, but it is really hard to make the increasing of construction cost

by 37% occur

The SRF Plaza project launched in accordance with the policy to encourage relocation the urban polluting enterprises of the Government Compared to renting land from the Government, if SRF Company convert the land use purpose to invest the SFR Plaza project, then it would increase the state budget with revenues from the land use right transfer tax, tax on commercial leasing, tax on apartment selling and corporate income tax Further more, the SRF Plaza project launched will create more jobs for laborers in the execution time, contribute to make landscape more beautiful and improve the quality of life for citizens

Conclusion, SRF Plaza project is financially and socially feasible, SRF Company should continue to use the leased land to consider the plan constructing SRF Plaza complex project

TABLE OF CONTENTS

Honor statement i

Acknowledgments ii

Tutor Comments iii

Abstract iv

Table of Contents vi

Abbreviations ix

List of Tables x

List of Figures xi

List of Appendix xii

CHAPTER 1: INTRODUCTION 1

1.1 Rationale of the study 1

1.2 Statement of the problem 2

1.3 Research objectives 3

1.4 Research questions 3

1.5 Scope and limitations .4

1.6 Research Method 4

1.7 Structure of the study 6

CHAPTER 2: LITERATURE REVIEW 7

2.1 Project valuation .7

2.1.1 What is the Project valuation? 7

2.1.2 Why is project valuation important? 7

2.2 Project Appraisal Method 9

2.2.1 NPV Method 10

2.2.2 IRR Method 11

2.2.3 BCR Method 12

2.3 Making decision 12

2.4 Risk management 13

2.5 Overview of Real Estate market 15

2.6 Review the construction of the complex 19

2.7 Key findings 22

CHAPTER 3: SRF PLAZA PROJECT APPRAISAL 24

3.1 Introduces of SRF Plaza 24

3.1.1 Land Description 24

3.1.2 Locality and Surrounding Development 26

3.2 Proposed Development 28

3.3 Factors Influencing the Evaluating 33

3.3.1 Time Planning 33

3.3.2 Construction Cost 34

3.3.3 Contingency Cost 37

3.3.4 Commercial selling price 37

3.3.5 Rate of payment progress 41

3.3.6 Area Rate for sale 41

3.3.7 Lease price for commercial office: 41

3.3.8 Parking charge for motorcycles and cars .41

3.3.9 Loans 42

3.3.10Depreciation 43

3.4 Cash flow chart 44

3.5 SRF Plaza project appraisal 46

CHAPTER 4: RISK ANALYSIS 47

4.1 Define the risk variables 47

4.2 Sensitivity analyzing results 48

4.2.1 Sensitivity analyzing results for apartment selling price 48

4.2.2 Sensitivity analyzing results for apartment selling growth rate 49

4.2.3 Sensitivity analyzing results for commercial leasing price 51

4.2.4 Sensitivity analyzing results for construction cost 53

4.3 Scenario analyzing results for apartment selling price and commercial leasing price 55

4.4 Simulation analysis 57

4.5 Conclusion on risk analysis 58

CHAPTER 5: CONCLUSIONS and RECOMMENDATIONS 60

5.1 Conclusions 60

5.1.1 Financially 60

5.1.2 Socially 60

5.2 Recommendations 61

Reference 63

Appendix 66

ABBREVIATIONS

List of Tables

Table 3.1: Input parameters of SRF Plaza (1) 29

Table 3.2: Input parameters of SRF Plaza (2) 30

Table 3.3: Comparison input parameters of SRF Plaza to other surrounding projects 31

Table 3.4: Phasing of project construction 33

Table 3.5: Construction Cost following the Decision No 411/QD-BXD 35

Table 3.6: Predict Construction Price Index in February 2012 36

Table 3.7: Estimated construction cost for SRF Plaza project 37

Table 3.8: Apartment selling price of projects surrounding the SRF Plaza 38

Table 3.9: Expected selling area rate 41

Table 3.10: Parking revenue for motorcycles and cars .42

Table 3.11 Loans 43

Table 3.12: Financial analysis of SRF Plaza project 44

Table 4.1 Change in apartment selling price to IRR and NPV .48

Table 4.2: Change in apartment selling price growth rate to IRR and NPV 50

Table 4.3: Change in commercial leasing price to IRR and NPV of the investor .52

Table 4.4: Change in construction cost to IRR and NPV of the investor 54

Table 4.5: Change in apartment selling price and commercial leasing price to IRR and NPV of the investor 56

List of Figures

Figure 2.1: The project development/evaluation cycle 8

Figure 2.2: Risk Management Model 14

Figure 3.1: Strategic Master Plan of District 6 26

Figure 3.2: Location of SRF Plaza 27

Figure 3.3: The frontage to An Duong Vuong Street 27

Figure 3.4: Surrounding developments 28

Figure 3.5: Cash flow chart of the SRF Plaza 45

Figure 4.1: The correlation of selling price change and NPV of investor 49

Figure 4.2: The correlation of selling price growth rate and NPV of investor 51

Figure 4.3: The correlation of commercial selling price and NPV of investor 53

Figure 4.4: The correlation of construction cost and NPV of investor 55

Figure 4.5: Crystal Ball simulation result for NPV 57

Figure 4.6: Crystal Ball simulation result for IRR 58

List of Appendix

Appendix 1: Land Use Right Certificates No.AD734143 dated 01 December

2006 67

Appendix 2: Leasing Contract 69

Appendix 3: Area calculation 71

Appendix 4: Phasing of project construction 73

Appendix 5: Predict construction price index 74

Appendix 6: Construction cost 75

Appendix 7: Rate of payment progress 76

Appendix 8: Income statement 77

Appendix 9: Crystal ball Simulation 89

CHAPTER 1: INTRODUCTION 1.1 Rationale of the study

The program to relocate the urban polluting enterprises and the plans to tackle thoroughly the polluting facilities into the industrial parks, industrial clusters with the term from 2002 to 2006 of the Government following the Decision no 64/2003/Q -TTg of 22/04/2003 are being implemented At Ho Chi Minh City,

these programs and plans are concretized by the Resolution of the people’s Council

no 22/2002/NQ-H of 29/06/2002, with proposals to relocate the polluting enterprises into the industrial areas and its surroundings Further, Decision of People’s Committee of Ho Chi Minh City no 80/2002/Q -UB of 08/07/2002 approved the proposals relocating the polluting enterprises in to the industrial areas and its surroundings

SRF is a state - owned enterprise that has been converted into Joint Stock Company with the its office located at 149B Truong Dinh Street, Ward 9, District,

is one of the companies affected by the above programs and plans

Currently, SRF Company, is a legal entity, has obtained the Land Use Right Certificates No.AD734143 dated 01 December 2006 and issued by the Department

of Resources and Environment of Ho Chi Minh City (appendix 1), the property is held under a lease term expiring in 2020 (appendix 2). The proposed development property has a total land area of 12,573m2 located at 127 An Duong Vuong Street, Ward 10, District 6, Ho Chi Minh City, is being used as the plant and factory for production and business operations of the company

Under the program to relocate the polluting enterprises into the industrial areas and it’s surroundings as mentioned above, whether or not, SRF Company must relocate their entire operations on that land into the industrial areas whether the land lease contract through 2012; and whether this location affect to the operation of the company in a positive or negative way

To encourage the relocation of enterprises according to schedule, the Prime Minister has issued regulations that the enterprises may change the Land Use Purpose to continue to invest in projects if this location is suitable for land planning and corporate business functions are suitable for investment projects

Thus, if SRF Company has a suitable development plan on this land, then it will create two major advantages for company:

 To get the preferential land price at the state price, not at the market price

 To utilize the existing land for investment because where SRF Company buy this land or not, SRF Company must pay the rent charge until 2020

Realizing that the demand for real estate is very high because urbanization and industrialization are being encouraged to develop by the government, and Ho Chi Minh City, one of biggest cities where is focusing on building development and investment Although real estate market is suffered from indigestion in a number of segments, but the picture of property market in 2012 is quite bright because source

of the market supply and demand is still so high

Also referring to some of the state-owned enterprises that has been invested on real estate field and built the complexes after equitization, such as Pinaco, Casumina Company…, SRF Company calculated the plan changing the land use purpose to invest a project building SRF Company decided to change the land into

a complex including residential categories and a commercial center, SRF Plaza, and SRF Company has launched the proposed developing plan for this SRF Plaza project

1.2 Statement of the problem

For enterprises, the investing into a project is a professional operating and method of business to make more profits, but this is also implicit risks Typically,

for projects, it takes long-term, large capital so that the financial appraisal for investment projects of enterprises is very essential Therefore, the financial appraisal of investment projects is essential The ultimate objective of financial appraisal is to answer the question: is the SRF Plaza project feasible in term of finance or not? Because if the investment project is a financial feasibility project, SRF Company will ensure the ability to withdraw capital, pay the interest, thus the enterprises can achieve profitability and safety targets

In short, to affirm certainty of the level of rationality and feasibility of the project and investment decisions of the project, it need to consider and examines the financial feasibility of the project, in other words, it need to evaluate the project

So the problem resolved in this research is to evaluate and assess the financial feasibility of the SRF Plaza project and to confirm that whether SRF Company should change the current Land Use Purpose to invest in SRF Plaza project or not

1.3 Research objectives

The purpose of research is to discover answers to questions through the application of scientific procedures The main aim of research is to find out the truth, which is hidden, and which has not been discovered yet (C.R.Kothari) Though this research study has its specific purpose, it falls into a number of following objectives:

 To assess the financial feasibility and economic efficiency of SRF Plaza

 To assess the risks of the project

 To conclude whether the SRF Plaza project should be accepted or not

1.4 Research questions

The objective of the study described above will be specified with the research questions:

 Should SRF Company continue to use the leased land to invest in SRF Plaza complex project?

 What are the risks of the SRF Plaza project if it is accepted?

1.5 Scopes and limitations

This study is not intended to examine the SRF Plaza’s structure, design or detail, and assume that all the requirements for constructing the SRF Plaza are to ensure compliance with the current provisions of law

This study limited research capacity in evaluating the financial feasibility of the SRF Plaza project with input data based on proposed development plan provided by SRF Company This study is not interested in calculating the cost of relocating the existing manufacturing operations to assess the benefits or losses of this relocation, because whether this project exists or not, relocating of production activities on this land into the industrial parks is required by the policy of the state

1.6 Research Method

Mr Robert B.Burns and Richard A.Burns (2008) wrote in his book that there are three general purposes of carrying out research The three purposes are exploratory, descriptive and explanatory The exploratory study helps us to acquire the basic knowledge of problem Descriptive research is suitable when the problem

is clearly structured at the same time, as the researcher has no intention to find connections between causes and symptoms Explanatory research is used when researchers are identifying factors causing specific phenomena The purpose of this research work is mainly descriptive, as already stated the above research objectives

Mr Robert B.Burns and Richard A.Burns (2008) further explain in his book that there are two methods that can be used when conducting research within the social sciences, namely the qualitative method and the quantitative method The focus of qualitative research “is not on numbers but on words and observations; stories, visual portrayals, meaningful characterizations, interpretations, and other

expressive descriptions” (Zikmund, 2000) Alternatively, quantitative research should be used when determining the quantity or extent of some phenomenon with numbers Quantitative research aims at generalizing by looking at a large number of entities and only at a few variables (Zikmund, 2000)

In this research work, the quatitative research method will be used Quantitative data has been collected mostly through secondary data, which already has been collected by someone else for another purpose (Dr Sue Greener) They are collected from correlative sources:

 Proposed development plan of SRF Plaza project is provided by SRF Company

 Information on macro economic such as GDP, CPI, and inflation rate

is mainly from General Statistics Office http://gso.gov.vn

 Information about interest rate is from the website of the State Bank

(http://www.savills.com.vn/), two leading global real estate service a leading global real estate service in Vietnam

 The apartment-selling price and time planning information of projects surrounding SRF plaza are gotten from its own website

 Some useful information gets from the internet web site

At the end of data collection phase, the first stage of data analysis was to relate the collected data to original research purpose; it helped to keep study on track After that, Microsoft Excel was used to arrange and calculate that data

1.7 Structure of the study:

This research is structured into 5 chapters as following:

Chapter 1 will introduce the research including research background, research problem, research questions, research objectives and research method

Chapter 2 will provide a literature review and the theoretical background on project evaluation

Chapter 3 will introduce of SRF Plaza, also highlights a number of characteristics and parameters to be used for analyzing, and then analyzes to appraise the project feasibility

Chapter 4 will analyze the financial risks of the project, define the risk events affecting evaluation criteria, and calculate the risk level as well as risk probability that the project can bear

Chapter 5 will points out conclusions of the research, to conclude that whether SRF continue to use the leased land to invest in SRF Plaza complex project or not, and if the SRF Plaza project is implemented, which risks must be limited so that SRF Company can get the maximize profits

CHAPTER 2: LITERATURE REVIEW

This chapter aims to discuss five major parts of the research questions from theoretical point of view The first section reviews the theoretical background on project evaluation The second one reviews the real estate market The other one review the building complexes in Viet Nam in general and Ho Chi Minh City in particular Then, a summary of key findings from these parts is presented with a justification of choosing the research topic And the last one will mention about

project appraisal methods

2.1 Project valuation

2.1.1 What is the Project valuation?

According to Fataheh Zarinpoush for Canada Volunteerism Initiative, Imagine Canada (2006), Project evaluation is a process of collecting and analyzing information in order to understand the progress, success, and effectiveness of a project Evaluation is an important aspect of project management It can facilitate the successful completion of the project, and inform decisions about the future of both the project at hand and other projects

2.1.2 Why is project valuation important?

According to the Joy Frechtling Westat (2002), there are two very important points here

First and foremost, evaluation provides information to help improve the project Information on whether goals are being met and on how different aspects of

a project are working is essential to a continuous improvement process In addition, and equally important, evaluation frequently provides new insights or new information that was not anticipated

Second, evaluation provides information for communicating to a variety of stakeholders It allows projects to better tell their story and prove their worth It also gives managers the data they need to report “up the line,” to inform senior decision

makers about the outcomes of their investments Outcome evaluation assesses the extent to which a project has affected participants or environment It focuses on immediate, intermediate, or ultimate outcomes that are attained as a result of completing the project The results of outcome evaluation should identify or anticipate both the desirable and undesirable impacts of the project Outcome evaluation can also determine how the needs that gave rise to the project were satisfied, or whether these needs still exist

Figure 2.1: The project development/evaluation cycle

(Source: Joy Frechtling Westat, 2002)

The purpose of any evaluation is to provide information for action (e.g., decision-making, strategic planning, program modification) Once evaluation information is available, it should be distributed among the project stakeholders and integrated into management practices If this is not done, evaluation is a waste of organization resources The results of project evaluation can be used to:

 Identify ways to improve or shift project activities,

 Facilitate changes in the project plan,

 Prepare project reports (e.g., mid-term reports, final reports),

Project Planning/modification

 Inform internal and external stakeholders about the project,

 Plan for the sustainability of the project, learn more about the environment in which the project is being or has been carried out,

 Learn more about the target population of the project,

 Present the worth and value of the project to stakeholders and the public,

 Plan for other projects,

 Compare among projects to plan for their future, and

 Make evidence-based organizational decisions

2.2 Project Appraisal Methods

Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders (Glen Arnold) There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows

The Non-discounted cash flows method is used when the use of discount or interest rate is not appropriate; the technique includes the following concepts: cutoff period, pay back period, simple rate of return, and net average rate of return Each has its advantages and disadvantages; however, they are all share one common thing: They did not consider “the time value of money”

The Discount Rate method is the rate of interest society should charge itself for the opportunity cost of time An appropriate discount rate is that rate which represents the rate of return an alternative investment of equal degrees of risk The technique includes the following concepts: Net Present Value (NPV), Benefit-Cost Ratio (BCR) and Internal Rate of Return (IRR) The Components of the discounted techniques of Cost- Benefit Analysis are Costs, Benefits, Interest Rate (discount rate), Life span of the project (time)

The Net Present Value and internal rate of return, examples of discounted cash flows, are in use in many large corporations and regarded as more effective than the traditional techniques of payback and accounting rate of return, there, the Net Present Value (NPV) method is used by 75% of firms when deciding on investment projects (Glen Arnold) Therefore, to evaluate the feasibility of the SRF Plaza project, NPV and IRR methods are used in this research The NPV decision rule assumes that project-generated cash flows are reinvested to earn a rate of return equal to the discount rate used in NPV analysis While, the IRR method assumes project-generated cash flows are reinvested to earn a rate of return equal to the IRR

of the project that generated those cash flows Besides NPV and IRR methods, Benefit – Cost Ratio (BCR) will be also used to evaluate the feasibility of the SRF Plaza project

2.2.1 NPV Method

Net Present Value (NPV) is the difference between the present value of all cash inflows and cash outflows associated with an investment project (Binh, 2009) The NPV establishes whether or not the investment project is an acceptable investment, given the return the investor requires from the investment

In order to calculate the NPV, the interest rate used for discounting the cash flows needs to be determined The interest rate is often referred to as Minimum Attractive Rate of Return (MARR) and it represents the rate at which the investor can alternatively invest his money, i.e the return of the most preferable alternative investment The planning horizon of the project also needs to be determined, and the cash flows for each period of the planning horizon projected It reduces a steam of costs and benefits to a single number in which costs or benefits projected to occur in the future are discounted (Glenn P.Jenkins and Arnold C.Harberger, 2005)

The principle problem associated with using the NPV method is the determination of the appropriate discount rate

NPV is so far considered as superior to all other methods (Amman & Jordon, 2005)

It is calculated using the following equation

(Source: Amman & Jordon, 2005, Project Analysis and Appraisal)

Where: Bi: benefit of project

Ci: Cost of project

It is a discounted rate that makes the NPV of a project equal to zero or its BCR

is one It is calculated by using the following equation:

(Source: Binh, 2009, Th m đ nh d án đ u t )

Where:

Bi: benefit of project Ci: Cost of project The IRR is yet another figure of merit The corresponding acceptance criterion against which to compare the IRR is the MARR If the investment’s IRR exceeds the MARR, the investment is attractive, and vice versa If the IRR equals the MARR, the investment is marginal (Robert C Higgins, 2009)

IRR is the norm to compare with the minimum acceptable rate of return (MARR) of the investor, but MARR is an element changing over time and depend

on the market, so for a long-term project such as SRF, the IRR method is used as support, or confirm the feasibility of the project

2.2.3 BCR Method

A benefit-cost ratio (BCR) is an indicator, used in the formal discipline of cost-benefit analysis that attempts to summarize the overall value for money of a project or proposal A BCR is the ratio of the benefits of a project or proposal, expressed in monetary terms, relative to its costs, also expressed in monetary terms (Anh, 2010) All benefits and costs should be expressed in discounted present values

Benefit = Present value of Benefit / Present value of Cost

(Source: Robert C Higgins, 2009)

The criteria to evaluation the project: The project is feasible when BCR > 1

2.3 Making decision

The financial ratios of NPV, IRR and BCR are used to help the investor be able

to decide whether to invest in the project (Th y, Hoa, Ánh, 2009) According to Ari

Riabacke (Ari Riabacke) - a decision-making should be considered under three types:

 Certainty, where each action is known to lead invariably to a specific outcome Assume that the parameter inputs are certainly, then the financial ratios of NPV, IRR and BCR will be calculated and these ratios

Risks always exist in every project, and this SRF Plaza project is not the exception So, the type of decision making under risk will be used in this research

2.4 Risk management

There is always risk existing in every project Risk identification consists of determining which risks are likely to affect the project and documenting the characteristics of each Project risks can be predictable, or completely unforeseeable Some risks can occur at any stage in a project, whilst others are associated with particular tasks (Dennis Lock, 2003) Risk identification should address both internal and external risks Internal risks are things that the project team can control or influence, such as cost estimates External risks are things beyond the control or influence of the project team, such as market shifts or government action (William R Duncan)

The generally accepted risk management model subdivides the risk management process as shown in below figure

Figure 2.2: Risk Management Model

(Source: Rory Burke (2010))

According to Giang (2010), there are two types of risk analysis, that are subjective analysis and statistical analysis

 Subjective analysis method is the method of analysis assumes the future value, with the change of selling price and then sees the change of NPV, IRR

 Statistical analysis method is the method of analysis variables of risk appearing randomly and the result of course is also random

In the subjective analysis method, there are three techniques - sensitivity analysis, scenario analysis, and simulation – are useful for making subjective estimates of investment risk And investment’s IRR or NPV depends on a number

of uncertain economic factors, such as selling price, quantity sold, useful life and so

on (Robert C Higgins, 2009)

 Sensitivity analysis involves an estimation of how the investment’s figure of merit varies with changes in one of these uncertain factors

Risk Management

Define

Objectives Define

Risk

Quantify Risk

Develop Response

 Scenario analysis is a modest extension that changes several of the uncertain variables in a mutually consistent way to describe a particular event

 Simulation is that use the simulation software

Crystal Ball is an easy-to-use yet powerful Monte Carlo simulation add-in to Microsoft Excel that allows analysis of the risks and uncertainties associated with Microsoft Excel spreadsheet models Monte Carlo simulation is a well-established method for defining the uncertain components in a mathematical model It involves generating numerous scenarios from a user-defined range of values, or a probability distribution for each uncertain parameter in a spreadsheet

It calculates the result for each scenario, generating a range of results, which is evaluated to assess risk Crystal Ball’s functionality includes sensitivity analysis, correlation, and historical data fitting The sensitivity analysis indicates which of the uncertain variables are most critical, and thus dominate the uncertainty associated with the model The correlation feature allows the user to link uncertain variables to account for their positive or negative dependencies If historical data are available, the data-fitting feature can be used to compare the data to the range of results and calculate the parameter values that yield the best fit to the data (Oracle Corporation, 2008)

The software of Crystal Ball is downloaded from http://www.crystalball.com The subjective analysis method with sensitivity analysis, scenario analysis and simulation will be used in this research

2.5 Overview of Real Estate Market

The Land Law of 2003 enabled market forces and price mechanisms to determine land values rather than allowing the government to control the land values

The market expanded gradually until 2007 Subsequently, as a consequence of the WTO commitment, a real estate speculation and aggressive demand led the prices to inflate significantly to its peak in the middle of 2008 During this period, monetary policies were implemented and interest rates were raised in an effort to cool down the market

In the second half of 2009, the economy in Vietnam started to see a recovery

on the back of stringent monetary and fiscal policies Through 2010 Vietnam continued to see a correction and stabilization in the second half of 2010 with GDP increasing to 6.5%, a level not seen since the second half of 2008

The lack of capital funding by banks, as a result of tightening lending policies, had detriment effects on the property market Foreign investors who were suffering from the implications of the global financial crisis at home exited the market, causing further contractions in the property market We have recently seen the re-emergence of foreign investors who are once again showing some signs of interest

in Vietnam Real Estate market As the monetary policies took effect along side the fiscal policies enacted, the economy has regained its footing and has started to recover

In 2011, the real estate market was faced with numerous difficulties, cash flow shortages due to the flow of capital into this market are limited, and buyers are not interested anymore However, as predicted by Mr Marc Townsend, Managing Director of CBRE Vietnam, at 2012 real estate workshop of CBRE Company, 2012 will be a year where companies and individuals can gain profit from the opportunities the real estate market, where difficulties encountered in the past in

2011 In the second quarter of 2012, the real estate market will be a steady recovery

in most segments So far, the government maintained tight monetary policies to ensure macroeconomic stability Overall, this policy will bring long-term benefits and stability of the economy The recent moves by the Government to control inflation and restrict credit will cause more difficulties in the short term Moreover,

in the year of 2012, the affordable housing segment of under $ 21 million VND/m2, targeting the middle class will become more vibrant every passing day

Although the rate of successful sale of apartments in Hanoi decreased significantly compared with previous years (45% compared to 80% - 100%) - the result of profuse new supply, the successful sale of apartments does not lower than average through the year, it shows still exist potential demand

At the "Which opportunities is for the real estate market in 2012?” conference

on 25/2/2012, Dr Le Xuan Nghia, Vice Chairman of the National Financial Supervisory Commission, forecast the inventory of property will be resolved until

2013 Vietnam real estate market is likely to warm up in 2013 So any business unfinished building projects should continue to prepare for new opportunities

According to Vietnam General Statistic Office, in 2011, Vietnam’s GDP was estimated to reach VND 2,536 trillion at current prices, equivalent to $120.7 million Meanwhile, real GDP grew moderately by 5.89%, much lower than the same figure at 6.78% in 2010 The decrease in economic growth was led by industry & construction sector because of high interest rates and decreasing demand expenditure in this area Compared to the year 2010, industry & construction sector only grew by 5.5% Meanwhile, services sector increased strongly by 7% but still lower than the same figure last year Notably, agriculture, forestry and fishery sectors achieved a high growth rate at 4% regardless of natural disasters’ effects in the second half of the year

Contracted and disbursed FDI reached $14.7 billion and $11 billion respectively 2012 FDI may not flow strongly into Vietnam because of instability in both global and domestic economy.

According to the Vietnam Foreign Investment Department, in the context of the world economy entering a difficult and dangerous phase, this number of FDI is still quite good, and it can be expected FDI for this year may reach 11 to 11.5 billion U.S as targets

The 2011 has been one of the most difficult years for the Vietnamese economy

in the past decade However, with the Government’s efforts to manage monetary and financial policies, inflation was kept at 18.58 With very high inflation rate and the high interest on loan (20%), the construction also cannot avoid bad effects and especially construction enterprises and real estate enterprises have met with a lot of difficulties

However, the year 2012, the Vietnamese Government is determined to bring down inflation to below 9% by continuing its monetary and fiscal tightening policies and renewing the economic growth model

Interest Rates

On the back of the State Bank of Vietnam, strict policies such as the devaluation of the Dong coupled with an increase in demand

It is commonly known that the vitality of the property market is heavily linked

to interest rates With the Global Financial Crisis causing low consumer confidence, State Bank of Vietnam had to lower interest rates to encourage spending in the economy With the assistance of the stimulus package, the economy began to recover again

In the early months of 2011, interest rates are still above 20%, but at the end of

2011, so many banks announced to lower interest rates on loans for company to 19% per year

17-Demand and supply

Demand for most classes of property is strengthening as the government encourages urbanization and industrial development The looser money supply policy after the global financial crisis has been the catalyst to rebuilding the property market

The Vietnamese real estate needs is still large, and the current difficult market

is also an opportunity with the medium-term vision Basically, people will approach

to cheaper prices and real estate investors who is viable through this time will be stronger, more professional if they know how to catch the opportunity of good position land

Demand for apartment building will be huge in the next time At the "Which opportunities is for the real estate market in 2012?” conference on 25/2/2012, Professor Dang Hung Vo, deputy minister of natural resources and the environment, said that in the national housing development strategic approved by the Prime Minister has a point worth noting: till 2015, apartment buildings should be the most popular type of housing projects, accounting for over 80% of the total new housing units

2.6 Review the construction of the complex

According to New Zealand Registered Architects Board

( http://www.nzrab.org.nz/default.aspx?page=218 ), A complex building is a

building that:

 Involves elements of high rise or large span, or both, requiring specialised or innovative structural solutions or of low rise requiring highly specialised knowledge; and , and must meet the basic criteria as population size to bring out the number of apartments, commercial services, site coverage, height restriction, plot ratio

 Has a significant impact on the natural and built environment and requires an informed response with respect to the urban or rural context and the physical, topographical, and climatic context

Typically in Ho Chi Minh City, there exist a series of complexes located in different district regions to meet the needs of each regional population, such as Saigon Pearl Complex (Binh Thanh Distrist), An Phú - An Khánh Complex (District 2), Léman CT Plaza (District 3), Kenton Residence (Nhà Bè), Everrich II, Sunrise (District 7), m Sen Plaza (District 11), and so on

The demand for purchasing land and houses increase in 2011 and many people will invest in real estate to reduce risk from devaluation of Vietnamese dong Moreover, speculators are not likely to become involved in the market for apartments

In current conditions, bank interest rates are still popular in high levels, together with the policies of the state in the first quarter of 2011, namely tight monetary policy, not only the real estate market in Ho Chi Minh City, but also the real estate market in Vietnam are influenced However, this is still an attractive investment channel chosen by many investors

In the context of current real estate market, due to tight monetary policy, some apartment projects had to stop or pause because of lack of funds, even if the basement of these projects had finished However the complex projects are implemented smoothly even thriving, typically is the success of the Sai Gon Pearl luxury complex project, which has implemented and handovered the apartment continuously in stages of 1a, 1b, 2a and 2b, the next complexes project are convenient located complex projects (prime location) as Kenton (Nhà Bè) or Sunrise (District 7)

Decision no 2127/Q -TTg of 30/11/2011 of Government, approving the

“National Housing Development Strategy toward 2020, vision of 2030”, which Ministry of Construction has presented to the Prime, by 2015, apartment buildings

must make up at least 30 to 80 per cent of new housing projects, depending on the type of urban area, together with a minimum of 20 per cent of houses for rent, the Ministry of Construction has also targeted an increase in the number of apartment buildings and houses for rent over the next 10 years

In urban areas, the number of the apartment reached 226,854 units; make up nearly 4% in total over 6 million houses / apartments in the market To meet the housing needs of urban areas, pull apartment price down, by 2020, one of methods pointed out by the Ministry of Construction is to increase the rate of high-rise condominiums, from approximately 4% now up 15%

In Ha Noi, the rate of apartment will reach 25-30% (currently 17%); in Ho Chi Minh City, this number is expected to reach 18-20% (currently 6%) In the big cities, the rate of apartment will reach 15% (currently 4-6%), and in others this number will reach 5-7% This bring about both saving a land and making a good looking, modernity and civilization for urban

Ho Chi Minh City continues to be at the forefront of Vietnam’s economic and commercial development this was demonstrated by the 9.9% year over year GDP growth demonstrated in the second quarter of 2011

In the first quarter of 2011, the sale of the Centre Point office building at 106 Nguyen Van Troi Street, Phu Nhuan District, HCMC, was successfully transacted When the sale was finalized, over 90% of the building was leased to high profile tenants including Bayer, Capgemini and Toyota The sale highlighted the potential for Vietnamese developers to recognize the profit opportunity within their projects

and to re -align capital – an underused strategy within the market (Source: Viet Nam Viewpoint June 2011 of CBRE).

The property that we are mentioning is located on the western side of An Duong Vuong Street, and approximately 9 km south west of the Central Business District of Ho Chi Minh City, for this reason, it has convenient access to most services and facilities

Surrounding development comprises of mainly older style low rise residences Some existing and proposed residential projects comprise the Hoang Anh Gia Lai Apartments, Ly Chieu Hoang commercial service centre, the Carina Plaza and the Binh Phu Apartments 1, 2, 3 Most of the projects are located in a radius of approximately 3 km of the subject property

The current situation of the property market in this location (district 6) favors low to mid end products that are now strongly focused on development to meet the high demand These segments have recorded strong interest from both developers and end-users since late of 2009 According to CBRE Research, most of these projects are located in suburban districts including Go Vap, Binh Chanh, Nha Be, Tan Binh, Tan Phu and District 8 So the location of this property is appropriate for

a low to mid end apartment development

2.7 Key findings

With some reviews on the real estate market as analyzed above, the investment

in building the complex will be feasible if investor determine market segment correctly The market segment for the project base on per capita income of each region, base on the existing infrastructure and structure as well as some expectations

in the future (under the direction planning of each district, vision of 2020) and then the investors can decide the level and scale of investment for the project Therefore, SRF Company has decided to offer a complex model, combining the public service and commercial center for residents in the complex as well as surrounding residents, namely SRF Plaza, with hope to bring more profits for the company

At the end of data collection phase, the first stage of data analysis was to relate the collected data to original research purpose; it helped to keep study on track After that, Microsoft Excel was used to arrange and calculate that data The financial ratios of NPV, IRR and BCR are used to help the investor evaluating the financial feasibility of the project Then the subjective analysis method with

sensitivity analysis, scenario analysis and simulation is used to assess the risk of the project and to help the investor deciding whether to invest in the project

Summary

The Vietnamese economy and property market were not immune from the economic downturn that affected economies worldwide Although most sectors of the property market were still uncertain through late parts of 2011, it is undeniable that the medium to longer-term outlook of Vietnam has large potential

As happened in other countries, the gap between the expectations of the purchaser and vendor are still elevated and the number of transactions that occurred

in 2011 was still limited However, with above positive considers, the real estate market is hoped to have an increase in interest from both local and foreign parties and expect the number of transactions to increase into 2012 as confidence grows Nevertheless, in the short-medium terms, there still remain risks which must

be considered in decision making

CHAPTER 3: SRF PLAZA PROJECT APPRAISAL

The purpose of this chapter is to take an overview of the SRF Plaza location, and the condition and the surrounding development of the property It will be used

as the basis of valuation This chapter also outlines the proposed development plan provided by SRF Company; point out the input parameters in the general level as the plot ratio, building density, expected selling price, construction costs as a base for financial analysis of the project Therefore, the main purpose of this chapter is to apply the collected data to assess the financial feasibility, appraise the project and then determine whether the SRF Plaza project is effective

3.1 Introduces of SRF Plaza Project

or negative After 2020, the land that SRF is leasing will be recovered by the State The land that SRF is leasing is very beneficial in geography because it located in inner city, with good infrastructure and convenient traffic, near the East-West road,

about 9km from the center of Ho Chi Minh City The land has been in power supply, water supply and drainage system At the date of inspection, most of the improvements were in obsolete status except one factory is still operating The improvements are considered to contribute no added value to the subject property and it is required to be demolished before any construction can commence

To encourage the relocation of enterprises according to schedule, the Prime Minister has issued regulations that the enterprises may change the Land Use Purpose to continue to invest in projects if the location is suitable for land planning and corporate business functions are suitable for investment projects With a suitable plan, the State will accept and charge the land price at the state price, not at the market price

With the advantage of the land as analyzed, SRF Company wants to continue using the land According to the program relocating the polluting enterprises into the industrial areas and its surroundings, the necessary condition for SRF Company

to continue to use this land is that there is a feasible project in changing the Land Use Purpose in accordance with the approved plans of urban district before 2012 for SRF Company

Thus, if SRF Company has a approved long-term development plan on this land, then the Land Use Rights Certificate will be granted to the SRF Company in the form of long-term stable ownership Therefore, SRF Company also calculated the plan that SRF Company decided to change the land use purpose to invest a project building and to develop the land into a building complex including residential categories and commercial center, with an expectation of benefit from the priority policy of the State

As per the Strategic Master Plan of District 6 scale of 1/10,000, the land is identified as being located within a designated area for existing industrial land

Figure 3.1: Strategic Master Plan of District 6

(Source: Strategic Master Plan of District 6)

3.1.2 Locality and Surrounding Development

a Local view

The subject property is located on the western side of An Duong Vuong Street with an approximately 150m of frontage The site is located nearly 450m south of the Phu Lam roundabout, approximately 100m north of Ly Chieu Hoang Street and

is around 1.5km north east of the East – West Highway The site is about 9km southwest of the Central Business District of Ho Chi Minh City It is convenient to access to most services and facilities

Some of photographs about the location of SRF Plaza are listed in figure 3.2 and 3.3

Figure 3.2: Location of SRF Plaza

Figure 3.3: The frontage to An Duong Vuong Street

b Surrounding Development

Surrounding development comprises of mainly older style low-rise residences along An Duong Vuong Street to the west Some existing and proposed residential projects including the Carina Plaza, Kien Thanh Apartments, Richland Emerald