Group Assignment 1: Case Problem
RT Property Management Sdn. Bhd. is a property management company located in Kuala Lumpur. As a property manager, RT is hired by building owners to manage their commercial or residential properties such as marketing of the property, tenant management (looking for tenants, collecting rents etc.), and property maintenance. Currently, the company has more than 50 properties in their portfolios, which includes shopping malls, retails outlets, apartments, and residential houses.
The board of directors of RT has decided that they want to further expand their business into property investment. They have identified several options. The first one is to purchase an entire apartment block in Cyberjaya from a property construction company. This $15 million apartment is still under construction, and will be ready in 6 months. The second option is an old, yet popular shopping mall in Cheras. The existing owner keen to sell this property for $10 million. However, looking at the condition of the mall, RT estimated that they need a further $3 million to renovate and upgrade the facilities of the property, and they need approximately 6 months to complete the renovation. In addition, the mall also need further facilities upgrading seven years from now, at approximately at $1 million worth of upgrading cost. The third option is to purchase a piece of land in Nilai. This vacant land is listed for $7.5 million and can be developed for residential or commercial uses in the future.
Since this is their first venture into the property investment, the company has set up an investment review committee. The committee needs to provide recommendation to the Chief Executive Officer (CEO) of RT on which investment should they choose. This review committee also will revisit the decision they make today at the 3rd year, and the 6th year of investment, and provide recommendation of their next course of action such as sell, maintain or further develop their asset. The CEO also has decided that any return from the investment will be evaluated at either review year, or at the tenth year of investment by deducting all investment capital, i.e. the purchase price, and other cost such as renovation, upgrading and development cost from the payoff value or selling price.
The committee has discussed several times and has decided on several important things related to the decision making process. The first one is the committee has agreed that the success of its investment is depends on population growth in the surrounding area of the property. Relating to this, the committee also has decided that they should measure perception about the population growth in each of the area, in the hope that the findings of the survey could be used to help them estimate whether the population will grow or not. The survey is done with respondents from local authorities, business owners and individuals residing or living in the area. The findings of the survey are shown in the Appendix 1.
Other than the above, the committee has also planned out several investment strategies for each option that they have now. Each strategy is developed based on decision alternatives at each review year, and the population growth prior to the review year.
For the apartment, should they see a population growth in the area within the first three years, the committee has decided that they should hold onto their asset, and review them again at the 6th year. On the second review, should the population continues to grow from the 3rd year until the 6th year, the company should continue with the investment and they can expect a payoff of $30 million at year 10. However, should the population stops growing from the 3rd year, the company has to decide whether to hold onto the asset, or sell it on the year 6. Should they choose to sell at this time, they are expecting $25 million for the entire apartment block. However, should they choose to continue their position, i.e. maintain the asset, they are expecting a payoff of $28 million at year 10, regardless of what would happened from the year 6 onwards.
However, should there is no population growth within the first three years, the company has to decide in the first review year at year 3 whether to sell or to hold onto the asset. If they sell the asset, they estimate that they can only get approximately $20 million. However, should they decide to hold onto it, they still need to review their investment again at year 6. At the second review year, if population start to show a positive growth after year 3 until year 6, they should continue the holding of the asset until year 10, with expectation of $25 million worth of payoff. On the other hands, if the population still do not show any growth from year 3 to year 6, the company has to decide whether to continue their position, or sell the property immediately. If they choose to sell at this time, they can only get approximately $22 million. However, if they still want to maintain their position, they are expecting to get approximately $23 million at year 10, regardless of what would happened from the year 6 onwards.
For the second investment option, which is the shopping mall, the committee has decided that if there is a population growth within the first three years in the surrounding area, the number of visitors to the mall will keep increasing, therefore they should keep the mall in their investment portfolio at least until year 6. However, if the population stops growing after year 3 onwards, they have decision to make at the second review year. At this point, should they choose to maintain their position, they are expecting a payoff worth of $28 million at year 10. However, they if they decide to sell at year 6, they expect that the mall is worth of $20 million. On the other hands, should the population in Cheras continue to see growth, they will continue holding the asset with expectation of payoff worth of $32 million at year 10.
If the population in Cheras do not grow within the first three years, the committee must decide on the first review year whether to sell or to maintain their position. If they choose to sell the property, the value of the shopping mall could be around $15 million. However, if they choose to hold on to it, they must review their position again in the second review year. This time around, if the population continue to show no growth and they decide to sell the property, the value will not increase much from year 3, approximately only about 5%. However, if they maintain their position up until year 10, they can expect a payoff about $17 million. On the other hands, should the population starts to show a positive growth after year 3, the committee decide that the company should continue to maintain the asset until year 10 as it will provide them a payoff in the range of $20 million.
The third investment option is the vacant land in Nilai. The committee has decided that the company should employ wait-and-see approach, and do not develop the land yet, at least until the first review year. During the first review, if the population within the first three year shows positive growth; the value of the land will increase at least by 15% from the purchase value. The company can either do three things – 1) to sell the vacant land immediately, 2) to develop the land into commercial, or residential building, or 3) to do nothing. If they choose to develop the land, the development will take around 3 years with an estimated development cost of $20 million. At the second review year, the developed land with properties within the area is worth of $50 million, regardless of the population growth. At this point, the company can either choose to sell the entire property, or to manage and hold onto them until year 10. If they choose to maintain their holding of the property, the value of their investment will be worth of $60 million in year 10. On the other hands, if they choose to do nothing in the first review year, the committee has decided that the company must let go the vacant land at the second review year in year 6. However, the value of the land during this time will be depending on whether the population in the surrounding area shows continuous growth or not. If the population continues to show positive growth, the vacant land could be sold at 35% higher from the purchase price, but if the population stops growing, the vacant land could only be sold at 25% higher from the purchase price.
At the first review year, should the population in Nilai do not show any growth in the first three years, the committee decided that the company only has two alternatives – 1) to sell the land immediately, or 2) to maintain their position and sell it at year 6. The first alternative will give them a payoff approximately about $8 million. However, if they decide to go for second alternative, the value of the vacant land will vary depending on whether there is a reversal in population growth between year 3 and year 6. Should the population start to show positive growth in year 4 onwards, the land could be valued at $9 million, but if otherwise, the land could only be sold at 5% higher than previous valuation in year 3.
Your group is the investment review committee of RT Property Management Sdn. Bhd. Your task is to prepare a report for your CEO and provide recommendation on what decision should the company choose based on the case statement above.
In preparing your report, take note of the followings: -
• You must use probability concept and decision tree analysis to help you preparing the report.
• However, the CEO never learn about Management Science, and have absolutely no idea about Probability nor Decision Analysis. Therefore, please provide detailed explanation for every step, stage of your decision tree, calculation etc.
• You may add any other assumption to help you prepare the report. However, a detailed explanation about the assumption must be provided, and they must not be in conflict with any information given in the case problem and Appendix 1.