Extension order processing and management

Hang Lung

To finalize a bid, the information Terry Ng has provided should be incorporated. In his scenario, the first year rent is not the only rent that should be included. The conditions of the rental market at the property will change after the first three years. The return on unleveraged investment in the first bid was based on 7.5% return, but was adjusted to 6% in order to arrive that the cutoff point where Hang Lung would drop out of the bidding. Beyond three years, this is expected to rise to 8%. However, the occupancy rate is expected to rise to 100% by this time. If these figures are incorporated into the land value, the value of the land changes:

Value Retail + Office

GFA

4,720,000.00

Leasable area (75%)

3,540,000.00

Occupancy (80%)

3,540,000.00

Gross Rental Rev, 1st year, sq ft

Net rental rev / sq ft (75%)

Net rental revenue (?)

836,325,000

Cap rate

All in cost

10,454,062,500

Land price estimate (30%)

3,136,218,750

However, Terry Ng's estimate of the rent is lower, at RMB 140 / ft2/yr. The new figures, reflecting this and the cost of developing the property are (for the first year):

Value Retail + Office

GFA

4,720,000.00

Leasable area (75%)

3,540,000.00

Occupancy (80%)

2,832,000.00

Gross Rental Rev, 1st year, sq ft

Net rental rev / sq ft (75%)

Net rental revenue (?)

297,360,000

Cap rate

0.06

All in cost

5,805,600,000

Land price estimate (30%)

1,741,680,000

Gross Unleveraged yield

0.051219512

This implies a much lower land cost, so it is important to calculate the future cash flows independently, rather than basing the land value off of the first lease cash flows. A net present value calculation can then be done, using the company's 6.15% ROE as the unleveraged discount rate. The NPV calculation reveals that the project's net present value over the course of the first nine years is RMB 4.081 billion.

Using a sensitivity analysis wherein the initial assumptions with RMB 315 per square foot per year in the first year and the high-end assumptions about returns in subsequent lease cycles (15% and 27%), the value of the property is just over RMB 6.7 billion.