As an owner of Bawasil Investment Company, you are considering the purchase of land that could be developed into an office project. At the present time, you believe that the site could support a 150,000 rentable square foot project with average rents of OMR25 per square foot and operating expenses of OMR13 per square foot. You also expect rents to grow at 5% indefinitely and believe that you should earn a 14% return (r) on investment. The building would cost OMR100 per square foot to build.
1- What would the estimated property value and land value be under the above assumptions?
2) Suppose you are also considering using the site as a retail building instead of an office building. The building costs will remain the same, i.e. OMR100 per square foot. However, given the different use of the site, you believe that the 150,000 rentable square foot site will have average rents of OMR27 per square foot and operating expenses of OMR18 per square foot. In this case, you expect the rents on the retail building to grow at 8% indefinitely and you still believe that you should earn a 14% return (r) on investment. What would the estimated property value and land value be under the above assumptions?
3) Given the highest and best use of the land in parts (a) and (b), what type of property will you consider: i.e. office or retail? Why?
4) Suppose the land owner is asking OMR8,000,000 for the land. Under the assumptions in part (a), would this project be feasible? Why?
5) If the land owner insists and the land must be acquired for OMR8,000,000, returning to the assumptions in part (a), how much of a change in the following would have to occur to make the project feasible? (Consider each item below one at a time and hold all other variables constant).
a) Expected return on investment (r). What does this imply?
b) Expected growth (g) in cash flows. What does this imply?
c) Building cost. What does this imply?
d) Rents. What does this imply?