Cromwell Property

Cromwell Property

Part one:

Cromwell property syndicate:

Management syndicates exist in Australia as companies which pool together funds and invest in various securities and property. Property syndicate exists as investment avenues and advisors on investment issues.

History of Cromwell group

Cromwell cooperation was formed in 1970 and was originality known as white river timber. It was then acquired by River investment limited which is a New Zealand company. In 1988 it changed its name to Equities limited when it under took management and cooperate investment. It was between 1994 and 1996 when it changed its name from Equities limited was known as Wesholm limited, its major activities being investments.

In 1997 it acquired a license to operate as a property syndicate from the Australian securities commission (ASIC).It again recapitalized and changed its name to Cromwell cooperation

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Cromwell Property

limited. Between 1998 and 2003 it purchased 14 investment properties in 5 states with a combined value of $300 million of which $58 million came from Cromwell diversified property fund.

In 2004 however Cromwell diversified property fund bought mire properties and acquired a land mark 700 Collins Street. In 2005 successful sale of assets delivering investment returns of 20.2% and later in the year 2006 it merged with 5 Cromwell managed syndicates to form Cromwell group.

In the same year It also hired the Price water house coppers limited partner and Michelle McKellar as non executive directors. Late in 2006 the group made Major announcement which included sale of Bundall corporate center and associate site worth $106 million making it possible to acquire assets worth $152 million. To date Cromwell group has vast investment portfolio investing much on construction and commercial development.

The principles of Cromwell group are opportunity, low risk approach to property enhancement and voids speculative property development projects. By actively managing risk Cromwell ensures security holders have limited risk and a well managed development activity. Cromwell group is a listed company at the Australian stock exchange. This makes it possible for investors to purchase and sell shares freely. For direct investors’ the minimum amount required is $ 20,000 then the rest additional investment is in multiples of $ 1,000.Only cheques and drafts from Australian banks and currency are allowed. There is no entry or exit fee required. Additional investments are made at any time by completing an additional investment form contained in the PDS.

List of properties owned by Cromwell group include the prime commercial office property at 101 Grenfell street ,modern commercial offices located in Canberra’s parliamentary Precinct which consist of 19 National circuit, commercial grade office complex of over 22,000 square meters of office accommodation.

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Cromwell Property

The term of Cromwell group:

The company operates on diversified investment portfolios which is non speculative in nature, There are no entry or exit fee and the set ongoing management fee is 0.825% per annum with a total of on going costs being 0.97% per annum. Distribution is done quarterly and can be reinvested to yield compound growth. Incase an individual wants to redeem his/her investment, liquidity is paid within five business days however the minimum required investment is $2,000.

Most recent valuation of Cromwell group

Prime commercial office property at Glenfell street Adelaide SA which is valued at $35 million. A modern office located in Canberra’s parliamentary Precinct at 19 National circuits, Barton Act valued at a cost of $ 40.5 million. A land mark commercial office building in Melbourne Dockland Precinct which is situated adjacent to the western end of the CBD.This property is at 700 Collins Street, Dockland, Vic $ 183 million. Commercial grade office complex of over 22,000 squire meters of office accommodation valued at $ 95 million. Another property owned by Cromwell group is Cromwell house at 200 Mary Street is strategically located in Brisbane central business district, which is about 125 meters from the GPO and in an area known as the Golden Triangle, Brisbane’s prime office location which is valued at $ 1000 million.

During the year 2004, the revenue increased by 18% to reach $9.59 million while the asset under management increased by 55% to a total of $544 million. At this period continued growth of wholesale and retail product distribution network and continued growth of property managements and in business.

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Cromwell Property

During the year 2005 there was increased recognition of the Cromwell brand. The assets under management increased by 35% to $732 million thus making revenue to increase by 99% to $9.122 million. Final divided of 1.50 per share was paid.

The funds under management of Cromwell group increased tremendously, during the year 2006 the net profit of $7.9million.This was an increase by 6.3%.the assets under Cromwell group increased by 87% to$ 1.137billion.The final divided of 4.5 cent per share. It is during this year that over $200 million investment inflows to the Cromwell

At the end of the year 2007 Cromwell group annual report showed that the company had significantly performed and the group made full year profit of $ 1113.9 million net tangible asset this is a 23% increase from the previous year of 96 cent per security; December 2006.

Future of Cromwell group

Investors of Cromwell group have got a bright future and high expectation on the return on their investment due the high performance demonstrated by the company in the several years. The group has been able to acquire prime properties and has on the other had been able to attract very qualified personnel to manage the company affairs, this includes

Part two:

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Cromwell Property

a). What is the project NPV and IRR at the end of the holding period?

The investment:

The investor can raise 60% of the value of the investment, the purchase price is 25,990,000 plus the duty fee equal to 1429450, the total sales price can therefore be considered to be 27,419,450, 257800 will be amortized for 5 years and therefore the investor will pay 51560

Each year for 5 years, the amount required to purchase will therefore be 27,161,650. Given this amount we can determine how much the investor will pay and how much will be obtained as loan, the investor will raise 60% and the value is16, 296,990 while loan value is10, 864,660.

The following table shows the expected rent value for the 7 year period assuming that the supermarket is given a 6 month free rent and the other tenants are given a 30% off for trhe4 first year.

Depreciation for the fixtures and capital is summarized in the following table for the 7 years:

depreciation

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Cromwell Property

value

yr 1

yr 2

yr 3

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Cromwell Property

yr 4

yr 5

Yr 6

Yr 7

Capital (2.5%)

17,413,300

435332.5

435332.5

435332.5

435332.5

435332.5

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Cromwell Property

435332.5

435332.5

Fittings and fixtures  (9%)

3,638,600

327474

298001.3

271181.2194

246774.91

224565.17

204354.3

185962.42

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Cromwell Property

However if we consider rent reviews without incentives the following will be the rent rate per square meters:

rent  reviews

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Cromwell Property

yr 1

yr 2

yr 3

yr 4

yr 5

Yr 6

Yr 7

Supermarket  (4 years 3.5%, next 5.5%)

$244

$252.54

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Cromwell Property

$261.38

$270.53

$280.00

$295.40

$311.64

Clothing*

$288

$300.96

$314.50

$328.66

$343.45

$358.90

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Cromwell Property

$375.05

Food*

$248

$259.16

$270.82

$283.01

$295.74

$309.05

$322.96

News  agency*

$270

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Cromwell Property

$282.15

$294.85

$308.11

$321.98

$336.47

$351.61

Chemist*

$270

$282.15

$294.85

$308.11

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Cromwell Property

$321.98

$336.47

$351.61

Other  specialty retailers

$320

$334.40

$349.45

$365.17

$381.61

$398.78

$416.72

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Cromwell Property

therefore the rent value will be as follows:

yr 1

yr 2

yr 3

yr 4

yr 5

Yr 6

Yr 7

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Cromwell Property

Tenant

Supermarket

$522,160

$540,436

$559,351

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Cromwell Property

$578,928

$599,191

$632,146

$666,914

Clothing*

$544,320

$568,814

$594,411

$621,160

$649,112

$678,322

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Cromwell Property

$708,846

Food*

$587,760

$614,209

$641,849

$670,732

$700,915

$732,456

$765,416

Newsagency*

$210,600

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Cromwell Property

$220,077

$229,980

$240,330

$251,144

$262,446

$274,256

Chemist*

$264,600

$276,507

$288,950

$301,953

$315,540

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Cromwell Property

$329,740

$344,578

Other  specialty retailers

$1,113,600

$1,163,712

$1,216,079

$1,270,803

$1,327,989

$1,387,748

$1,450,197

total

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Cromwell Property

$3,243,040

$3,383,755

$3,530,620

$3,683,904

$3,843,891

$4,022,858

$4,210,208

after determining the possible income we need to also consider the expenses that will be include and in this case we consider depreciation, interest on loan, operation costs and other costs, this will help us calculate the net present value:

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Cromwell Property

The net present value (NPV)

NPV = ∑ (Ct/ (1+r) t)

Where C is the cash flow, r is the discount rate and t is time.

When the NPV is greater than zero we should accept the investment, if the NPV is less than zero we reject the investment but if it is equal to zero we are indifferent on whether to accept the investment or reject it.

The net present value is calculated as follows:

year

Ct

r

t

1+r

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Cromwell Property

(1+r)t

NPV

0

(16,104,734)

0.2

0

1.2

1

($16,104,733.71)

1

$310,241.39

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Cromwell Property

0.2

1

1.2

1.2

$258,534.49

2

$430,366.97

0.2

2

1.2

1.44

$298,865.95

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Cromwell Property

3

$553,008.42

0.2

3

1.2

1.728

$320,028.02

4

$678,532.68

0.2

4

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Cromwell Property

1.2

2.0736

$327,224.48

5

$815,860.70

0.2

5

1.2

2.48832

$327,876.12

6

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Cromwell Property

$957,557.78

0.2

6

1.2

2.985984

$320,684.16

7

1,096,778,000

0.2

7

1.2

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Cromwell Property

3.5831808

$306,090,610.89

total

$291,839,090.40

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Cromwell Property

The net present value is $291,839,090.40 while the cost was purchase cost was 27,161,650, because the net present value is higher than the cost we can state that this investment is profitable and therefore we should accept.

The internal rate of return:

The value of the internal rate of return for the project is 84%, this is derived using the cash flow over the period, because we are given the interest rates as 9.7% therefore this is a profitable investment, this is because when the rate or return is greater than the interest rates than the investment option is profitable.

b). Comment on your results and explain whether, in your view, the investor

should proceed with this investment.

When the net present value is greater than the cost of the project then the investment option is usilly profitable. In our case the net present value is equal to

291,839,090 while the project cost is 27,161,650 and becosue the net present value is greater than the cost then it is profitable to venture. On the other hand the value of the internal rate of return also clearly explains the option, the internal rate of return is 84% while the interest rate is 9.7%, when the internal rate of return is greater than the interest rate then it is profitable to investment, in our case this has occurred and therefore it is advisable to continue with the investment.

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Cromwell Property

(iii) How sensitive is the IRR to changes in the LVR and the interest rate? Provide a sensitivity table (Data table in Excel) for LVR in the range 50% to 100% (incrementing by 5%) and interest rates in the range 6% to 12% (Incrementing by 0.5%)

The following is the sensitivity table, it shows the change in IRR to changes in LVR:

LVR

IRR

50%

87%

55%

89%

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Cromwell Property

60%

92%

65%

94%

70%

97%

75%

100%

80%

104%

85%

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Cromwell Property

109%

90%

114%

95%

122%

100%

132%

From the table it is clear that when we increase the amount financed by loan than the internal rate of return increases, this shows that it would be profitable to finance the entire project through loan, the following chart summarizes the results:

Interest rates and IRR:

In the excel worksheet we assume that the investment is financed entirely through a loan and the investor does not contribute anything, the following table summarizes the results of the

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Cromwell Property

sensitive analysis table:

IR

IRR

6%

134.5991%

6.5%

134.2529%

7.0%

133.9101%

7.5%

133.5709%

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Cromwell Property

8.0%

133.2351%

8.5%

132.9026%

9.0%

132.5735%

9.5%

132.2476%

10.0%

131.9249%

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Cromwell Property

10.5%

131.6052%

11.0%

131.2887%

11.5%

130.9752%

12.0%

130.6646%

As the level of interest rate increases then the IRR keeps on declining, therefore interest rates will affect the investment Internal rate of return whereby as the interest rate rises then the internal rate of return also declines, the following chart summarizes the results:

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Cromwell Property

References:

The Cromwell group website (2008) about Cromwell group, retrieved on 26th May, available at http://www.cromwell.com.au/home

Company profile (2008)About the Cromwell group, retrieved on 26th May, available at http://goli ath.ecnext.com/coms2/product-compint-0001204634-page.html

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