Real Estate Development Analysis

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LAMBCHOP DEVELOPMENTS

DEVELOPMENT COMPARISON

INTRODUCTION

This report provides feasibility, cash flow and various risk analysis of the returns of two proposed developments with consideration for both Lambchop Developments, and for possible equity investor, Idaho Investments. The report will provide a summary of the analysis, a comparison of the developments and will make recommendations as to which development is most suitable both for the developer or investor.

Target rates of return have been established by both parties and are as follows:

Lambchop Developments

Profit and Risk Requirement 23%

Development Target Rate of Return 40%

Idaho Investments

Before Tax Equity Return 15%

The first is a redevelopment of 60 Mill Point Rd, South Perth, from its current commercial use, to accommodate 12 luxury apartments and 2 super luxury penthouses over a total of 8 levels. The second a mixed retail and office development in the prime office location of West Perth, offering 6,000m2 of premium office space over 6 levels and 1,000m2 of retail space.

DEVELOPMENT ONE

LUXURY RESIDENTIAL APARTMENTS

60 MILL POINT RD, SOUTH PERTH

DEVELOPMENT OUTLINE

Lambchop Developments has collaborated with the South Perth Redevelopment Authority with the prospect of redeveloping 60 Mill Point Rd, from its current commercial use. The site will be redeveloped to accommodate 12 luxury apartments and 2 super luxury penthouses over a total of 8 levels. The location of the proposed development, South Perth has evolved into an exclusive residential suburb due to its location near the Swan River and its easy access to Perth’s CBD, as such shows high demand for luxury apartment style accommodation.

A resources boom in Western Australia has seen an increase in population and substantial flow of capital into the local property market, leading to both significant rental growth and increases in residential apartment values. Such activity would see apartments in the proposed development selling for approximately $10,800m2 for the standard apartments, and $14,000m2 for the penthouses. Recent data suggests selling price growth rates in luxury apartments has remained strong despite price growth in other residential properties falling during the first half of 2007. The analysis also includes selling price growth rates at 12% as suggested by various recent data collected by Lambchop’s analysts including the Westpac Residential Property Outlook and Forecasts Update for 2007-2009.

Population Growth: Western Australia

Source: ABS

The increase in development activity coupled with rising construction costs has also increased the cost of building, current construction cost growth has been between 10% and 12% per annum as suggested in the Westpac/AIQS BRIX 2007 Building Survey. Apartments featuring contemporary luxury design and high quality finish such as those proposed will require building costs of approximately $5,525m2. Further, site works including the addition of underground parking, landscaping and below ground pool have been priced at approximately $318,200.

The owner of the current site has been in discussions with Lambchop Developments and has indicated he would accept a sale price of $4,500,000.

DEVELOPMENT FEASIBILITY ANALYSIS

Lambchops static feasibility model has produced a land price for the site of $4,740,000. Given the tentative offering price of $4.5 million this development looks feasible and would return Lambchops required profit of 23% of total costs, leaving $240,000 additional funds. The additional funds suggested by the model could be used as an addition to developer’s profit, alternatively, a more likely situation given the current market conditions is that another buyer for the site may arise and the additional funds could be used to secure the site at a higher price.

DEVELOPMENT RISK ANALYSIS

Analysis suggests the following changes to current figures would be required for the development to breakeven:

Variable Current Figures B/E Figure %Change

Land Price $4,500,000 $4,740,000 5.06%

Interest Rates 8.25% 14.47% 6.22%

Construction Costs $11,368,200 $11,368,200 2.24%

Developer's PRF 23% 25% 2%

Gross Realisations $21,850,000 $21,413,000 -2%

Observation of these figures indicates the proposed development is sensitive to a number of key variables. Most relevant are increases to overall construction costs by 2.24% and a decrease in gross realisations. Further analysis of these vulnerabilities is facilitated by scenario analysis, incorporating the likely probability of predetermined market outcomes as detailed in the following table.

Market Conditions Excellent Good Expected Poor Bad

Probability 10% 25% 50% 10% 5%

Rental Growth 14.0% 13.0% 12.0% 10.0% 8.0%

Construction Cost Growth 9.0% 10.0% 12.0% 13.0% 14.0%

Land Price $4,350,000 $4,400,000 $4,500,000 $4,550,000 $4,600,000

Interest 7.75% 8.00% 8.25% 8.50% 8.75%

Expected Project NPV $2,365,534

Expected Project IRR 46%

Analysis of these figures combined with the breakeven analysis suggest