On the afternoon of 2nd September 2019, an ordinary Sunday, Nancy Wong and William Chan made an agreement to further investigate the possibility of developing off-campus student housing for taught master students near the main CUHK campus. After many years of negotiating with the government and real estate tycoons in Hong Kong, the two CUHK alumni finally got the opportunity to develop the property and contribute to their home institution. Although it seems to be a great opportunity, a more careful analysis needs to be conducted in terms of potential returns to the investment.
Nancy Wong and William Chan received their bachelor’s degree in the 1990s from the Chinese University of Hong Kong (CUHK). They worked together for the student union of the United College. After graduation, Nancy Wong continued pursuing her master’s degree and worked for Cheung Kong Holdings for years. With her strong passion and talents for real estate, she got very rich by purchasing apartments and renting them out. Recently, she has noted the poor performance in the Hong Kong stock market, decreasing in four consecutive months, which she regarded as an opportunity instead of a crisis. She forecasted that the young people may choose to go back to school after losing their job in the unstable market. A rising demand for student housing is expected.
William Chan got his bachelor’s degree in finance and has been working as a real estate acquisitions analyst for several years. Recently, he joined a part-time program provided by CUHK in order to improve his skills in qualitatively analysing the real estate market. Through the communication with his classmates in the program as well as other taught-postgraduate programs, he was aware of the shortage of off-campus housing for students who would like to live near the campus. According to university regulation, in-campus hostels (Exhibit 1) are not available to taught-program students, which means that they have rent a place near the campus. Unfortunately, available rental places in the market are mostly in poor quality which cannot satisfy the requirement of postgraduate students. What if we can develop a building for the postgraduate students? He recalled his long-time friend Nancy Wong who is familiar with real estate development. He contacted Nancy immediately to discuss the possibilities of the CUHK off- campus housing project. That is how the “mission impossible” starts.
In order to decide the housing location, Nancy Wong and William Chan began their research by learning the basic facts about CUHK and its surroundings. CUHK was founded on a hill to the east of the New Territories, which is surrounded by four main communities: Tai Po, Ma On Shan, Sha Tin, and Tai Wai (Exhibit 2). The hill and lake around campus build natural barriers to development due to the limited amount of available land near CUHK. Therefore, potential development location may be one of these four communities. Note Nancy and William already got approval for property development for any of the four areas.
Before tackling questions, collecting relative materials may assist in your analysis. Here are some clues for your preparation.
(1) The demographic statistics near the campus.
You may want to know the population, the average age, and household income within 5 miles of the CUHK campus.
(2) Current housing status
The composition of student population and the on-campus capacity.
(3) Market data
On-campus housing costs and rental costs in nearby communities, such as Tai Po, Ma On Shan, Sha Tin, and Tai Wai.(we choose Tai Wai)
The following information may help you answer questions.
i. Current student housing choices and prices
ii. Rental rates for off-campus housing
iii. Rent levels and their recent growth
iv. Vacancy rates in near-campus areas
v. Near-campus sales prices
vi. Near-campus cap rates
The capitalization rate, often referred to as the “cap rate”, is a fundamental concept used in the world of the commercial real estate. It is the rate of return on a real estate investment property based on the income that the property is expected to generate.
vii. Near-campus sales prices per bedroom
1. Given the background above and materials you collected, provide a brief project proposal which contains design (how much square footage needs to be built and how many rooms would be rentable), hard demolition costs, construction costs, total soft costs, and project timeline. Assume that hard construction costs are financed with a construction loan. Justify any additional assumptions you must make to complete your analysis.
Hints: the example of project timeline is as follows.
Construction Loan Payoff
Completed Asset Value
(1) You could change dates based on your research.
(2) Land acquisition, loan payoff and asset value could be determined in the following questions. ((You can leave them blank or omit them in the proposal)
(3) You could assume construction cost evenly spreads across months during the whole construction period (in this case: from September 2020 through August 2021).
(4) Soft costs could be a fraction of total construction costs. You can make appropriate assumptions according to the information online.
2. Qualitatively discuss the benefits and costs of choosing the location of your choice.
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