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Financial Strategies For Property Projects

Financial Strategies For Property Projects. Development Plan. Residential units – area , no. of units, flat size, target buyers Car parks – no. of car parks, for sell to buyers of residential units or retain for rental Retails – area, with wet market and kindergarten, usually retain for rental

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Financial Strategies For Property Projects

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  1. Financial Strategies For Property Projects

  2. Development Plan • Residential units – area , no. of units, flat size, target buyers • Car parks – no. of car parks, for sell to buyers of residential units or retain for rental • Retails – area, with wet market and kindergarten, usually retain for rental • Development period, developed by phases, expected completion date

  3. Development Plan (cont’d) • Any environment protection requirements • Any government requirements – bus terminal and community centre • In line with company’s business strategies • Joint venture with other developers • Board approval

  4. Development costs • Land cost and land premium • Site formation and foundation • Superstructure and substructure • Professional fess - architect, engineers, surveyors and project manager • Marketing costs – on site show flat, sales teams, commission to sales agents • Sundries (handover expenses) • Interest expenses

  5. Project financing • Debt financing • - Syndicated bank loan • - Interest rate (HIBOR + margin) • - Drawdown schedule • - Upfront fee to bankers and other legal costs • Equity financing • - Funds from internal generated funds • - Interest costs • Target capital structure

  6. Project appraisal • Forecast profit statement • - Sales proceeds less total development costs • - Estimated total development profit before tax and after tax for future years • - Current tax rate in HK: 16.5% • Forecast yearly cash flow • - Sales proceeds (depend on sales program) • - Immediate mortgage and stage payment • - Yearly payment of development costs • - include opportunity costs & exclude sunk costs

  7. Project appraisal (cont’d) • Development project program • Residential breakeven sale price • Profit as percentage of sales • Profit as percentage of total development expenditure • Internal rate of return (IRR) • Effect on company’s gearing & liquidity ratios • Sensitivity analysis (profit effect on 10% decrease in sale price or 5% increase in interest rate

  8. Accounting treatment • Properties developed for sale: • - recorded as property under development and classified under current assets • - interest capitalized up to occupation permit date • - profit recognition (HK-Int 3 – Pre-completion contracts for sale of development projects) • Properties developed for rental (HKAS40): • - recorded as investment property • - subject to year-end valuation

  9. THE ENDTHANK YOU

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