CHINA SQUARE CENTRAL PROPERTY: PROPOSED ACQUISITION BY ALLCO REIT Harvard Case Solution & Analysis

CHINA SQUARE CENTRAL PROPERTY: PROPOSED ACQUISITION BY ALLCO REIT Case Solution

Question 1

            If we compare the China Square Central Property with the other properties of Allco in Australia, then we can see that the proposed acquisition is dilutive. This is because the principle investment policy of Alco REIT is to invest in retail and office properties across Asia Pacific region. The objective of the REIT was to always invest in high quality real estate properties however, the China Square Central Property cannot be considered as a high quality real estate property. This is because of the huge capital expenditure requirements for this property and the un secure underlying tenant covenants. Furthermore, the other properties of Allco REIT in Australia such as Central Park in Perth are a premium grade office tower and it is also the tallest building in Perth.

REIT is generating net income of S$ 19.2 million from this property and an income of S$ 3.5 million from its investment in Allco Wholesale Property fund in Australia. However, the investment returns or the investment income for the China Square Central Property is much lower as compared to the other Australian properties which had been acquired by Allco REIT. Furthermore, the China Square Central Property site is also zoned as white site which has a maximum gross plot ratio of 4.2. Therefore, we can say that the property is dilutive and thus there need to be something to maximize the yield from this building after it has been acquired by Allco REIT.

For instance, the manager already has plans to enhance the yield of the property and thus increase the returns to the unit holders. The rents for the current retail leases at China Square Central Property are also low than market rates, therefore, the upgrading and re positioning of the retail component of the property should be performed by the manager to enhance its yield. There are also many opportunities to maximize the revenue from the property from the fountain square and the first store atrium. Finally, increases in building yields could be achieved by enhancing the customer amenities and design layout, increasing the shopping traffic flow through accessibility and new image, altering the tenancy mix positively and retaining the existing quality tenant.

Question 2

            The net operating income for the property has been calculated in the excel spreadsheet for the 10 year period. The revenues for the 18 cross street, 20 cross street and 22 cross street have been calculated based on their respective rental rates per month. The total revenue is therefore, multiplied by 12 to compute the rental income for the year. The occupancy rate for the property has been stated to be 97% which is assumed to be constant for the 10 year period. After this, all the operating expenses for the property have been computed based on the rates given in the question and case. After the calculation of gross rental income, the tax of 20% on undistributed income of 10% is calculated and interest has been deducted to get the Net Operating Income for each year. The loan amortization schedules for the LN and the RC facilities have been calculated separately which are also shown in the excel spreadsheet.

Question 3

            The capitalization rates which have been assumed by Savills are 5.25% for retail component and 3.75% for office component. If we compare these capitalization rates with the recent transactions and the property market scenario in Singapore then we can see that the valuations for the offices in the Singapore market has been higher and this could be seen by the decline in the vacancy rate of the offices in the downtown hill which has been falling consecutively since the last 6 quarters and it has declined to 5.7% in the second quarter of 2005 from 19.3% in the first quarter of 2004.......................

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