HOUSING FINANCE ASSIGNMENT

Housing Finance assignment

Housing Association

Introduction

The feasibility study carried out to determine whether a business problem can be solved and how. The main objective of the study is to assess each of the potential alternatives for the probability of meeting business needs in economic, operational and technical terms. The result of the feasibility study is the recommendation of the chosen solution for Housing Association HA, which will then be specially defined and developed as a business cases.

Discussion

As we know that in UK, the rent has been increasing, we have made assumption looking at the market trend of the Housing. In order achieve the objective of the Housing association; the following estimation has been made which are true in real world. Last year, weekly rent for 2011-12 three bed was £79, while two bed units £71 and lastly One Bed units is worth for £58 which making the total revenue as followed.

Units

Weekly Rent 2011/12

Total

Three Bed units

£79

500

Two Bed units

£71

800

One Bed units

£58

200

Cost

 

Salaries

900,000

Maintenance contracts

950,000

Other (including office rent)

200,000

Cost of debt

3,100,000

Total cost

5150000

In order to be able to evaluate this investment opportunity, I am going to make the following assumptions that would help me to project the rate of return that HA could expect if the project is accepted and decide whether it would be profitable for HA to undertake this project.

Income from the rent on all 3 types of units will increase by 2% per year, while the income from laundry will remain unchanged.

In this case the expected monthly rent from each type of unit and expected monthly income from laundry would be:

2012

2013 Q1

2013Q2

2014 Q1

2014 Q1

2015 Q1

2015 Q1

2016

Three Bed units

£460-700

£469-714

£479-728

£488-743

£498-758

£508-773

£518-788

£528-804

Two Bed units

£523-850

£533-867

£544-884

£555-902

£566-920

£577-938

£589-957

£601-976

One Bed units

£560-1000

£571-1,020

£583-1,040

£594-1,061

£606-1,082

£618-1,104

£631-1,126

£643-1,149

Coin Laundry

£700

£700

£700

£700

£700

£700

£700

£700

And the projected Gross Income per year would be:

2012

2013 Q1

2013Q2

2014 Q1

2014 Q1

2015 Q1

2015 Q1

2016

Gross Income:

£553,980

£564,892

£576,021

£587,374

£598,953

£610,764

£622,812

£635,100

Rent

£545,580

£556,492

£567,621

£578,974

£590,553

£602,364

£614,412

£626,700

Laundry

£8,400

£8,400

£8,400

£8,400

£8,400

£8,400

£8,400

£8,400

Starting in 2012, I estimate the losses due to vacancies (and non-payment) to be 5% of income from the rent over the next 3 years (although the current occupancy rate is ~97%). Applying this assumption, the expected Vacancy Rate Reserve over the next 3 years would be:

2012

2013 Q1

2013Q2

2014 Q1

2014 Q1

2015 Q1

2015 Q1

2016

Vacancy Rate Reserve

£16,367

£27,825

£28,381

£28,949

£29,528

£30,118

£30,721

£31,335

The operating expenses (including insurance, utilities, gardening, trash, etc.) will increase by 1% every year for 3 years starting in the beginning of 2012.

2012

2013 Q1

2013Q2

2014 Q1

2014 Q1

2015 Q1

2015 Q1

2016

Expenses

£206,116

£208,177

£210,259

£212,362

£214,485

£216,630

£218,796

£220,984

As it is mentioned on city-data.com, the total value of the property located consists of:

Value of the land:55% (£3,135,000)

Value of the building:45% (£2,565,000)

The apartment building will be fully depreciated over the next 3 years at the rate of £128,250 (= £2,565,000 / 20) per year using a straight-line depreciation (note: the land cannot be depreciated).

HA will forgo the opportunity offered by the owner of the apartment building for a “New First Loan” at 6% interest that is due in 2013, and look for other sources of funds.

Down-payment of £1,425,000 (25% of the total listed property price), of which:

£570,000 will be acquired from the Japanese investor who will be paid 5% annual dividend, and

£855,000 will be paid by HA in ...