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 (?)

669,060,000

Cap rate

0.075

All in cost

8,920,800,000

Land price estimate (30%)

2,676,240,000

This gives a return in the first year of 7.5%, which is higher than on the other HLP projects -- these range from 5.7% to 6.7%.

The calculation is highly sensitive to the rent. If rents are at the low end (similar to Wuxi and Shenyan 66, the other two massive projects) then the value of the property is around? 1.44 billion, roughly 46% lower than the current estimate. If rents are at Jinan levels, then the value of the property is around ?2.2 billion. HLP needs to feel comfortable with the high-end revenue estimate. Given the strong economic growth in...

The company has built its estimate of the land value based on optimism with respect to the Chengdu economy and the Chinese economy. The site is excellent, which is another reason for optimism. If the price rises above this optimistic figure, the company should walk away. HLP should establish a cut-off point at which it walks away. The current land value is based on a 7.5% cap rate, but for all of the firm's other projects the first-year returns are lower. This implies a higher land value. At a 6% cap rate, the land value would be?3.345 billion. If the auction goes beyond this cutoff point, HLP should walk away. Below this point, the company should be able to make the numbers work as there is no reason to believe that their optimism…