As reflected in the article from Business Times, the average selling price is approximately $1,000 to $1,050psf. Therefore, we have made use of this range to come up with the selling price of each unit type. Recognising that there will be discount given to larger unit, the proposed selling prices are as follow:
Given that area of 2 Bedroom = 950 sqf
3 Bedroom = 1,280 sqf
4 Bedroom = 1,420 sqf
Penthouse = 2500 sqf
(Note: The floor area for each bedroom type is based on similar development of similar site area)
(Refer to Appendix_ for greater details)
Selling Price:
For 2 Bedroom➔ 950 sqf x $1050/sqf = $997,500
For 3 Bedroom ➔ 1,280 sqf x $1030/sqf = $1,318,400
For 4 Bedroom ➔ 1,420 sqf x $1000/sqf = $1,420,000
For Penthouse➔ 2500 sqf x $1000/sqf = $2,500,000
As cited (Business Times, 2009), the bid by Autobox was estimated at $508 psf per plot ratio (psf ppr), therefore we can calculate the cost of the land:
Land cost = bid pr psf ppr x Total permissible GFA
= $508 x 647,599.2796 sqf
= $328,980,434
Also, the breakeven cost is estimated at $900 psf upon the completion of the project (Business Times, 2009). To find the construction cost, we subtract the land cost from total cost (TC).
TC = 647,599.2796 sqf x $900 = $582,839,352
Construction cost= $582,839,352 - $328,980,434 = $253,858,918
Therefore, Profit = Revenue – land price – construction cost
= [($997,500*no. of 2-room sold) + ($1,318,400*no. of 3-room sold) + ($1,420,000*no. of 4-room sold) + ($2,500,000*no. of penthouses sold)] - $328,980,434 - $253,858,918
As reflected in the findings, Dakota Rise proposed its average selling price to be approximately $1,000 to $1,050psf. Therefore, in order to calculate the Est. Total Revenues (TR), we assume an average selling price of $1,025psf. The Est. TR can be calculated by multiplying the average selling price with the Built-in Area, $1,025 x 582,839.3516sqf ≈ $597.41million.
Therefore, the Est. Total Profit for developing Dakota Rise can be calculated by subtracting TC from the TR, $597.41 – $582.8 = $14.61million.
Est. Unlevered Profit for the Dakota Rise is $14.61million.
Step 3 Acquiring Input Data
The input data has been obtained from various sources, which includes official websites of Urban Redevelopment Authority (URA) and Housing and Housing Development Board (HDB) for information on site area, GFA and cost of the land etc.
On top of that, websites of property firms and commentaries are also used to acquire necessary data. Websites of various condominium developments have been used to make comparison between our proposed condominium development and the existing condominium developments. This is to find out their unit mix and what they are offering. Furthermore, research from secondary sources such as news articles and annual reports have been studied to derive the breakeven prices of the existing condominium developments, estimated profits, construction costs and average selling prices.
Some of these figures derived are estimated based on the existing condominiums as the exact data could not be found due to its confidentiality. One example is the construction cost. However, as the validity of the results of the model is as good as the validity of the data that goes into the model, a sensitivity analysis would be performed in later part of this report, which determines the impact of minor changes in input data.
Step 4 Developing a Solution
The optimal unit distribution mix would be developed using the Linear Programming Model. Simplex method would be used as there are more than 2 variables.
Assumption:
- Take-up rate would be 100%
To find the optimal unit mix, we let the number of
2-room unit be X1
3-room unit be X2
4-room unit be X3
Penthouses are not included as a variable as we assume that the penthouses would be provided for exclusivity. Therefore, revenue from the sale of these penthouses would be:
Revenue (penthouses) = $2,500,000 x 4 = $100,000,000
Objective: maximize profits by developing the optimal mix
[$997,500X1 + $1,318,400X2 + $1,420,000X3 ] + (selling pr of penthouse*4) – land pr – construction cost
➔ [$997,500X1 + $1,318,400X2 + $1,420,000X3 ] + $100,000,000 - $582,839,352
Next, to derive the constraints, few existing private residential projects were selected to do a comparison study with the new project at Dakota Crescent. The purpose of comparison is to ensure that the figures we derived are to the best accuracy.
Market Trend of Unit Distribution Mix
By studying the unit distribution mix of other condominiums it provides a guide as to what competitors are offering, an indication on the market trend and the take up rate of project launches would shed light on the demand of buyers.
Selection of condominium developments as guideline
A few condominium projects have been selected based on the following criteria:
The condominium developments to be selected should be launched recently so as to give an indication of the present market trend. Further, they should be developments that attract a high take up rate, not slow selling developments that could suggest having a suboptimal set of unit distribution mix that does not attract potential buyers.
The development must have a fairly large GFA as Dakota Rise has a maximum permissible GFA of 647,599sqf. This is a relatively large GFA as compared to other property launches like the Optima @Tanah Merah which has a permissible GFA of only 297,643sqf. Property development with similar size area would provide as a fair study as a development with a smaller permissible GFA would not have the luxury to build too many units and may they have a different target segment or niche market that they would like to serve. By keeping these criteria in mind, we try to keep the external factors constant.
Further according to The Straits Times on 18 October, there was a report on the popularity of small studio apartments ranging from 258sqf to 500sqf. The Lenox a development with an approximate Gross Floor Area of 300,000sqf has 39 units out of 76 units (51%) that are 1- bedroom studio apartments.
Finally, one of the projects should be in the vicinity of Dakota Rise as projects located in different areas could appeal to different market. For example, the more affluent market may have the tenancy to purchase units of bigger floor area. By studying property developments in the vicinity would provide us with the foresight on whether to increase or decrease units of bigger floor area.
Selected Market Developments
The Arte@ Thompson, Soleil@ Sinaran and the Caspain were all chosen as part of the study as they are newly launched and have a sizeable GFA of at least 400,000sqf. The Arte has a GFA of 503,513sqf, Soleil’s of 469,725sqf and Caspian at the Jurong Lakeside district with 828,852sqf. Dakota’s Rise has 647,599sqf in maximum permissible GFA.
Dakota Residences is a condominium that is also located in the Dakota Crescent vicinity. It has a GFA of 437,068sqf. It was a fairly popular project as 80 units of 122 units were taken up within a weekend during one of their sale phases in year 2008.
Due to some of the developments having studio apartments and others not having them in their unit distribution mix, it would only be practical to take the lowest percentage and the highest percentage of each unit type of the various developments and develop a range from the lowest and highest percentages.
Nonetheless, it is observed from the data that 3 room units make up the most popular unit size amongst property developers. They typically make up about 50% of the total units. Penthouses on the other hand due to their exclusivity and large unit area may explain why they typically take up only about 5% of the total units in most developments.
Requirements by Autobox
Autobox has specified certain requirements in the development. Due to observation of popularity with apartments of small unit area in the market, Autobox would like Dakota Rise to be in tandem with recent demand. Upon consideration with recent legislation that affects the building of studio apartments and concern amongst buyers as whether studio apartments would be practically livable, Autobox maintains its decision to having 2-bedroom unit as the smallest apartment available. Nonetheless, in response to market demand, we would require these 1055sqf apartments to make up at least 50 % of the total unit distribution mix.
Also, it plans to build around 600 units which is easily justified by the larger permissible GFA as compared to smaller developments that typically houses 300-400 units.
In addition, to minimize construction cost and due to the soil on the site, there will be no basement in the scheme.
(Note: information is cited from the news article in Business Times on the site)
Constraints:
With the above, the constraints are as follow:
X1 => 50% (requirement by Autobox)
22% <= X2 =< 55% (based on highest and lowest range from selected developments)
15% < X3 < 30% (based on highest and lowest range from selected developments)
X1 + X2 + X3 <= 1
950 X1 + 1,280 X2 + 1,420 X3 <= 582,839.3516
X1, X2, X3 >= 0
As there would be an estimated of around 600 units, the percentages of the above constraints are converted to numbers to facilitate analysis using the software. Therefore, the constraints used are:
X1 => 300 (50% x 600)
132 <= X2 =< 330 (22% x 600 & 55% x 600)
90 < X3 < 180 (15% x 600 & 30% x 600)
X1 + X2 + X3 <= 1
950 X1 + 1,280 X2 + 1,420 X3 <= 582,839.3516
X1, X2, X3 >= 0
Using QM for Windows, the results are:
(*refer to appendix- for details)
X1 = 301 X2 = 132 X3 = 90
Total number of units: 301 + 132 + 90 = 523
Land area unused: 582,839.3516 - [(301 x 950sqm) + (132 x 1280sqm) +
(90 x 1420sqm)]
= 129.3519sqm
Profits = [$997,500X1 + $1,318,400X2 + $1,420,000X3 ] + $100,000,000 - $582,839,352
Profits = [($997,500 x 301) + ($1,318,400 x 132) + ($1,420,000 x 90)] + $100,000,000 - $582,839,352
= $119,236,948
Therefore, Autobox is recommended to build 301 2-room apartments, 132 3-room apartments and 90 4-room apartments. This would yield a profit of $119,236,948.
Step 5 Testing the Solution
Before the proposed development mix can be implemented, it can be tested to determine the accuracy and to ensure completeness of the data used by the model.
One method used to determine if the proposed unit mix is feasible was one of the qualitative models i.e. conducting a consumer market survey. These additional data can then be compared with the original data, and statistical test can be employed to determine whether there are differences between the original data and the additional data. Significant differences means more effort would be required to obtain accurate input data. If the data are accurate but results are inconsistent with the problem, then it indicates that the model may be not appropriate.
We have partnered major property agencies in order to gain access to their clientele base. By soliciting input from potential or future customers, on their future purchasing plans, a forecast on the current and future market demand is acquired.
At the same time, a series of “what-ifs” (sensitivity analysis) was conducted and assumptions were reviewed to determine its validity. One review was on future market trends and demands. The assumption made was 100% take-up rate, which would not affect Autobox’s profits as long as all the units are sold, regardless of the time period.
However, if the future market trend is in favour of even smaller apartments, i.e. studio apartments of minimally 377sqf or 484sqf, as offered by HDB, the sale of Dakota Rise would be adversely affected. This is because the smallest apartment (2-room apartment) of Dakota Rise is 1055sqf. Given the proposed unit mix; 50%, 22%, 28% of 2-room, 3-room and 4-room apartments respectively, the demand for our 2-room apartments would expect to be lower and the profits of Autobox would be adversely affected as 50% of the unit mix is 2-room apartments.
Step 6 Analysing the Results and Sensitivity Analysis
Analysing the results start with determining the implications of the solution. If the previous step confirms the accuracy of the development mix, the construction can be proceeded. Otherwise, more research has to be done and the development mix has to be altered according to the market demand.
Sensitivity Analysis
A sensitivity analysis was conducted to find out how an increase in the minimum 2-room apartments due to greater demand would affect the optimal unit distribution mix. 2-room apartments was adjusted from at least 50% to 60%. The rest of the percentages requirement was subsequently reduced by 10% to cater for more space for 2-room apartments. The adjusted constraints are:
X1 => 360 (60% x 600)
72 <= X2 =< 270 (12% x 600 & 45% x 600)
30 < X3 < 120 (5% x 600 & 20% x 600)
X1 + X2 + X3 <= 1
950 X1 + 1,280 X2 + 1,420 X3 <= 582,839.3516
X1, X2, X3 >= 0
The optimum solution became 471 units of 2-room apartments, 72 units of 3-room apartments and 30 units of 4-room apartments.
Land area unused: 582,839.3516 – [(471 x 950sqm) – (72 x 1280sqm) –
(30 x 1420sqm)]
= 629.3516sqm
Profits = [($997,500 x 471) + ($1,318,400 x 72) + ($1,420,000 x 30)] + $100,000,000 - $582,839,352
= $124,507,948
Conclusion: If step 5 or market situation proves that there is now greater demand for 2-room apartments, it is proposed to adjust the mix as the above. Profit would be increased by $5,271,000 ($124,507,948 - $119,236,948).
Step 7 Implementing the Results
Management support and user involvement are important if not critical to the success for the implementation of quantitative analysis. After the solution is implemented, it would be closely monitored using the moving average model to capture the impact of shock during the averaging process. Over time there might be numerous changes that call for modifications of the original solution such as, a changing economy, fluctuating demand, and model enhancements etc, which might require the analysis to be modified.
Decision Theory Models
Decision Analysis
It is assumed that take-up rate would be 100% under the current market. However, if there is sudden change to the economy and the situation turns negative, take-up rate would definitely fall. Thus, profits are assessed using decision tree. Market survey was also conducted to find out the probability of a favourable and unfavourable market.
Favourable- 100%
Unfavourable- 50%
Appendix-
References