Feasibility Report for Hayson Group Thesis

Acting on the written instructions received from Hayson Group of Companies dated 23rdDecember 2009, we have carried out an inspection of the proposed site for the development of sixteen town houses. The inspection was undertaken for estimating the valuation for development of sixteen town houses only. The valuation suggested in this report is to be relied upon subject to the qualifications expressed in the report.

Subject to the comments contained and other assumptions used for preparing this report, we have estimated the value of construction of each town house unit at 179, Quarry Road, Dural NSW 2158 as if complete per the instructions of Hayson Group of Companies in the order of $ 1,100,000. This value is arrived based on the calculations shown as appendix to this report and is to be considered as value for only as at 05thJanuary 2010.

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(Note: As if complete implies that the development of the property to be in a completed state as on the date of valuation and reflects the present market conditions)

Due to the impact of the global economic recession and the poor performance of Australian economy, the residential market in Sydney has been slowing since the mid of 2008. Sales volumes of residential properties across Sydney are currently much lower than that existed during 2006-2007.

The residential market in Sydney is unlikely to show significant improvement over the next twelve months period. While Dural is considered more secure than the other majority regions of Sydney, the rental yields are typically less as compared to other cash rates and consumer price index.

Higher demand for investment on residential properties and excessive reliance on negative gearing allowances resulted in a boom on housing during 1999-2003. This along with the recent downward economic trend has driven the rental yields to the current low levels. However, the interest rates may go up slightly in the near future (Aspect Valuation Services, 2005).

These changes in the residential property market and the oversupply of the properties will induce large number of investors to sell NSW properties as their investments. The lower rental yields have become unattractive and have been unable to help a large section of the investors sustain their mortgage payments. However, this phenomenon may not apply to Dural properties, as there are a lower proportion of investors found in this area compared to many other suburbs in Sydney.

The prices are expected to be consistent to large extent, as the owner-occupiers who are less sensitive to rental yields and who do not have mortgages on their properties may not opt for selling the properties.

Dural being a semi-rural suburb offers a calm and peaceful living to the inhabitants. The village offers a perfect rural experience, close to a major city. Dural has a range of attractions including fruit orchards, an array of nurseries, art and craft galleries and hobby farms. Dural is an perfect location for a scenic drive with great opportunities for romantic vistas with roadside stalls of fresh flowers and produce, all providing for a rewarding experience. (.com, n.d.) Because of these features, the property in Dural is likely to fetch a price above the average level.

Another factor to consider is that the residential property market of Sydney is still under correction to the recent economic changes. Although the data released from the major reporting services have been inconsistent and created doubts on the methods of gauging price movements, the interpretation of the data gives an indication that the Sydney real estate prices have not been stabilized so far.

Project Scope and Approach to the Study
Hayson Group of Companies keeping in with their strategy of promoting real estate properties in different regions has commissioned this study into the feasibility of setting up sixteen town house projects in Quarry Road, Dural NSW. The study methodology consisted of collection of data from various sources including interviews with professional people, use of search engines in the Internet and examination of relevant reports from government and other organizations of repute (Robertson, 2008). Estimation of the development cost has been done based on the data collected and a cost benefit analysis using factor of production based approach for studying the feasibility. The cost of development and the discounted values of future cash inflows from the project are considered to make the final recommendations.

Summary Conclusions and Recommendations
The report applies yield realization rate (discounted cash flow) method for calculating the net present values and sales comparison approach to estimate the likely realization from the sale of the sixteen houses proposed to be constructed in this project. The report has arrived at the following results after an extensive research and study of various aspects connected with the development of the housing project in Dural area. Estimated profits are calculated using profitability equation.

This report is subject to the qualifications expressly incorporated within and the report is to read carefully for any interpretation or explanations. It is not possible to extend any liability for matters arising out of this report, on which the authors do not have professional expertise. Liabilities do not arise in respect of any matters arising out of any information used in the report as supplied by agents, sales reporting services, government departments or other organizations where it is not possible to verify the accuracy of the information with reasonable due diligence. Liability will not be extended to any persons other than the said Hayson Group of Companies, Sydney except with written permission from the author of this report.

This report does not make any comment on the construction as the construction is yet to be commenced and completed. It is assumed that the development will be completed to the standards specified by the plans submitted by the client. It is advised that any prospective purchasers, tenants or mortgagees have to make their own enquiries with regard to the adequacy and quality of the proposed construction.

Where it was not possible to verify about the inclusion of GST in the sale price or rentals, it is assumed that the sale price or rentals are inclusive of GST.

For the purposes of this report, market value is defined as The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. (De Villiers Chartered Surveyors, 2009)

The Hayson Group has established a reputation over 40 years for identifying new areas of opportunity and creating properties of quality and innovation. (Hayson Group, 2008) The company has set many precedents in the real estate development in Australia.

In Sydney, the company has acquired lot of underdeveloped properties and with their experience in developing real estate properties; they have become the largest residential and commercial strata converters. Through skilled marketing the company ensures that its innovative product achieves mass attention and recognition. Whether strikingly progressive or projecting elegance and luxury, the marketing campaign for each development has consistently succeeded in reaching the target market effectively. (Hayson Group, 2008)

The Hayson Group has developed several office and retail projects in Sydney. These developments include Skygarden in Sydneys Pitt St Mall, the Manly Wharf retail development, the Kogarah Town Shopping Centre, Cremornes Metropole shopping centre and Hillsdales Southpoint shopping centre. (Hayson Group, 2008)

The property under review is yet to be listed in the strata. The site is referred to as lots A and B in Deposited Plan 105055 at Dural in the Local Government Area of Dural. The property represents the whole of the property contained in Computer Folio Identifiers A/105055 and B/105055. For the purposes of this report, the land was identified from a draft strata plan that was forming part of the sale deed for the land in place.

No current survey has been conducted. The valuation is based on the assumption that there are no encroachments upon or other alienation of the property. This position needs to be reconfirmed by a current survey report or by a certification from a Registered Surveyor. If there are any encroachments then the cost of development is to be suitably adjusted on intimation to the author of this report.

Nature of Interest
The nature of interest in the property is assessed as simple vacant possession.

Rating and Taxing
Enquiries at Dural Council indicate that the site has not been subjected to use for any industrial or manufacturing purposes. The site has not been the storage space for any chemicals or other hazardous substances either above ground or underground. Enquiries with Environmental Protection Authority (EPA) reveal that the Authority has not come across any instances of contamination on the site. The inspection of the surface of the site confirms these enquiries. However, there has not been any inspection of the site beneath the surface. There has been no vegetation or soil sampling undertaken. Therefore, this estimation is subject to a satisfactory contaminated site assessment report to be obtained from an environmental consultant.

Planning and Control
Inspection of the certificate under section149 and enquiries with Dural Council reveal that the site is zoned Residential B (Medium Density) under Hornsby Shire Local Environmental Plan, 1994. The current use of the site to construct town houses appears to conform to the Zoning provisions.

Location and Locality
Dural is a semi-rural suburb of Sydney situated in the state of New South Wales (NSW). The village is located 36 kilometers away in the North Westerly direction from the Sydney central business district. Baulkham Hills and Hornsby Shire Council governs the village. The postal code is 2158 and has a population of 7055 as of 2006 census (Australian Bureau of Statistics, 2007).

The site is located in Quarry road which is a two laned (each one for both directions) local through street. The road runs tangential to Dons road and Harris road. The site is very near to Dural Park and provides for a private setting offering exceptional views of Berowra Valley.

More specifically the site is situated on the eastern side of the street with very limited traffic. There are no apartment buildings within the immediate vicinity of the site.

Source: (Realestate.com.au, 2009)
Concrete kerb and guttering and concrete footpaths are available on Quarry road where the site is located. The road has a bitumen surface facilitating easy driving. Subject property has provisions for electricity, water, gas, telephone and sewage connections.

Proposed use of the Property
The report used the Highest and Best use analysis for evaluating this property situated in Quarry Road Dural. In a highest and best use analysis the use of the property is determined based on its ability to fulfill the tests of

physical possibility,
legal permission,
economic feasibility and
maximally productive.
The property under review satisfies the condition of physical possibility and legal permission for development of townhouses in the area. The other tests of economic feasibility and maximally productive ability will be determined based on an assessment of the cost-income approaches detailed in the later part of this report.

Main Structure
This proposal assumes that the subject property will be used to develop sixteen town houses. Each house will be a two storey, four-bedroom house. Other than the four bedrooms, the property will consist of a study, living/dining, laundry, kitchen, and three bathrooms (one is an en-suite attached to the master bedroom).

Provisions, Fittings and Furniture
The proposed property will consist of washing machine, drier, microwave, oven, four burner gas stove, range hood and dishwasher. Additionally the proposed town house will be provided with double stainless steel sink, hot water system, three baths, three shower recesses, two double vanities and three toilets. The subject property will have floating timber and wool/Alpaca carpet floor coverings, plasterboard internal linings, MDF skirtings, comices and architraves, aluminum windows and external doors, glass balustrades, timber slat privacy screen, solid timber internal doors and halogen and recessed downlight light fittings. (Aspect Valuation Services, 2005) Except for the MDF, all other construction materials will be of high quality and the finishing will be done to meet the highest available quality.

Other Developments
There are other improvements proposed to be added to the property, which include courtyard with large planter box, two balconies lined with , double garage with internal access, .

Approximate Areas
The proposed construction will consist of the following built-in areas:

240 square meters
Courtyard 90 square meters
Balconies 100 square meters
Planter boxes 30 square meters
Garage 40 square meters
Private entrance 30 square meters
Total Strata area 530 square meters
The draft strata plan indicates these areas for different parts of the proposed townhouse.

The building is single and two-storey construction. The construction will be cement rendered and painted masonry walls. Since the construction of the property has not commenced, it is assumed that the entire development will be carried out as per the architectural plans provided for our review and the quality of construction shall be as per the norms provided by the client.

The marketability of the property and other issues relating to the real estate market conditions prevailing in Dural are presented in this section.

Terms of Sale
The property appears to be not subjected to the incidence of GST and there will be no need to adjust land tax. It is for the vendor to specify any modifications in the proposed construction including alteration of the area of construction up to 5%. It is advised that proper legal advice on the terms of sale contract be obtained from a practitioner of repute.

This section presents a brief review of the real estate market.

The international housing market has been sluggish especially after the decline of the market because of subprime deals. The recent economic downturn has further affected the recovery of the market. Australian housing market has reacted along with the global trend and the housing sector has not been doing well in the recent years.

In the year 2009, significant fall in prices of real estate has been noticed in the regions of Bondi, Mosman and Palm Beach. Australian Property Monitors (APM) observed that the prices in these suburbs have come down more than 14% during 2008-2009 and they are expected to fall further. Preliminary figures from APM confirm the median house price in Palm Beach fell from $2,512,500 in the year to December 2007, to $2 million in December 2008 a 20.4 per cent drop. Mosman dropped from a median of $1.2 million to $865,000 a fall of 27.9 per cent. (The Sunday Morning Herald, 2009) The real estate agents are of the view that the property prices have declined steeply in the premium suburbs.

We do not believe that there will be a drastic increase in the prices of townhouses in Dural during the next quarter. Prices have more or less remained steady in Dural and other similar suburbs in Sydney for a long period. It is also unlikely that the slight increase in the interest rates will influence the purchasers at the top end of the market, as these buyers are insensitive to interest rates. Even if the townhouse market in Dural show, any increase it is unlikely that demand for such houses will increase enough to supplement the market movement.

Investments in properties like townhouses always represent greater investment risk, as resale of such properties in Dural and similar other suburbs have gone down considerably. The asking price for the townhouses is approaching the lower ebb, as people prefer to own apartments because of cost and maintenance factors. It is confirmed that the property under review is not subject to any heritage affectations.

The proposed use is as a townhouse, which appears to be the most suitable use considering the current zoning of the property. There is only limited number of townhouses of the proposed size and quality has been in existence in Dural. However the number of potential buyers also appears to be less as the location is little far off for a dweller with an occupation in Sydney. The proposed cost is in the region of $ 1,000,000. Only four or less number of such townhouses within the price range of $ 500,000 $1,000,000 has been transacted in the Dural region during the last 12 months. Many of these units have taken a time of more than six months to find a prospective buyer. One townhouse of this size and price range has been sold in the Quarry Street in the month of October 2009.

Current Market
Property investment in NSW has become less attractive with number of changes made by the state government in the land tax and the legislation governing negative gearing also led to a drop in the demand for the houses. Coupled with this is the global economic downturn, which has hit the property prices and demand for houses in almost all suburbs of Sydney. Even though the median house price in Dural as exhibited in the graph shows an increase between July and September 2009, the number of transactions in this type of townhouses is very less. However, there is a sharp decline in the median price for the units, which clearly indicates the market condition of Dural.

Source: (Realestate.com.au, 2009)
Source: (Realestate.com.au, 2009)
The above table indicates the median house prices and unit prices during the period from December 2008 to October 2009. From the table it may be observed that the median price in respect of the houses has just been between $ 500,000 and $ 700,000.

The following graph shows the position of demand and supply for properties in the suburb of Dural. There has been a sharp decline in the people looking for houses in Dural, during the last quarter of 2009. The trend for advertised properties is almost stagnant over the period from July to December 2009 indicating the sluggishness of the house property market.

Supply and Demand
The feasibility of any housing project should consider the prevailing demand and supply conditions of the market. In the project proposed by Hayson Group to be located in Dural seems to be assessed based on the available information on demand and supply for housing in the market. This section deals with this issue.

Source: (Realestate.com.au, 2009)
From the following table showing the property transactions in Dural suburb, it may be seen that the last property transaction in Quarry Road has taken place in May 2009. This list shows only 18 transactions between the periods October 2008 until December 2009, which is indicative of a slow market for real estate property in the region.

Project Values
It is vitally important that the project consider the recent transactions in respect of similar properties. For properties on rental, the recent rental values in the respective market would provide guidance. In the same way, the housing projects should consider the sale transactions effected in the region or locality during the past year. These transactions will be able to provide a meaningful guide for arriving at estimated demand and value for the proposed houses.

The investor activity in Dural region is low since the market is dominated mostly by owner-occupiers. The investors in such suburbs typically are not subjected to financial constraints as prevalent in other markets. They generally rely on their own finances. Therefore, properties of this type normally are left vacant between stays, and they do not solicit tenants and leasing does not appeal to this kind of owners. When leased the yield from rentals do not exceed 4%.

Source: (Realestate.com.au, 2009)
Although the local marketing agents may create an impression that business is as usual for them, the reality is that there is a decline in the property transaction to at least 50% of what it was during the housing boom. It is the tactics followed by the agents to maintain the price levels. Expression of interest, tenders or auctions are the usual methods adopted for selling this type of properties. Despite auctions, clearance rates for the properties of this type are near record low.

The information gathered and presented on the property under review, and the data on sales are collected through the local council and other Local, State and Federal government departments.

Assessment and Valuation
The definition of value is the monetary value estimated by the property development feasibility report. There are different aspects of arriving at the value of a property. They are; cost of the property, physical deterioration in the value of the property over the period, functional and external obsolescence and income capitalization.

Cost Approach
Cost approach is the most common property valuation approach and in this section, the cost of the property is arrived by determining the new current new cost of the property. The economic foundation of the cost approach is the principle of substitution: a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of equivalent utility. (Property Tax Valuation, 2006)

The cost of land is estimated at $ 5,000,000 based on the asking rate in Dural area. The cost of construction has been estimated based on the current construction cost obtained from a search of the Internet and enquiries conducted with reasonably reputed construction companies. The total cost as arrived in the above table has been assumed reasonable taking into account the quality requirements of the client, Hayson Group. The construction materials are assumed to be of highest quality to result in a superior construction.

Current Building Costs
The current building costs include different aspects of cost. The cost varies for each area of housing construction, which needs to be considered with care in the feasibility report.

In general, the building costs have remained constant to some extent over the past few years in Australia. Construction costs at the current level are estimated at $ 1200 per in Sydney suburbs.

Building Cost Trends
Projected Building Costs
Deterioration in Value
Typically, in any appraisal, depreciation in the value of the property is to be recognized due to physical deterioration, functional obsolescence, and economic obsolescence. Physical deterioration is the loss in the value of the asset due to use or expiration of useful life of the asset. Functional obsolescence is the loss in the value of the asset caused by the inefficiencies or inadequacies of the property. Economic obsolescence is caused by factors, which are external to the property such as escalation in the cost of materials, labor or utilities. This factor has been recognized in the calculation of cost of the houses by providing 5% on the total cost to cover the cost escalations. Apart from the economic obsolescence, there will be no occurrence of any other deterioration in value of the property, since the houses will be constructed anew over a period of 12 to 18 months. Therefore, no depreciation has been taken into account for the calculation of the cost and net income from the project.

Calculation of Estimated Profits
The following calculations show the estimated market value on completion of the project, estimated development costs and estimated profit out of the project. These estimates will be compared with the net present values arrived at based on the income capitalization approach to decide on the financial viability of the project. The estimated costs take into account the current construction costs and other development costs. The total costs and the land cost are deducted from the estimated value of completion to arrive at the estimated profit.


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