Credit Analysis and Lending Management
Case Study:
As a loan officer in a bank, you received an application for a real estate loan from a borrower to buy an apartment in Dubai. The apartment is an unfurnished one bedroom flat situated in Park Island building (Sanibel) in Dubai Marina. Details about the property (and a comparable one sold in the same building) are presented in the following table:
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Property to be valued (A)
in April 2023
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Comparable Property (B)
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Sale date
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March 2023
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Selling price/value (AED)
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?
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1,600,000
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Gross annual rent (AED)
|
?
|
?
|
|
Annual Maintenance fees (AED/square feet)
|
10
|
10
|
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Service charges (AED/square feet)
|
20
|
20
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Vacancy rate (%)
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10
|
10
|
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Area (square feet)
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923
|
909
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Price (AED/square feet)
|
?
|
?
|
|
Gross annual rent (AED/square feet)
|
?
|
?
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Proximity to A
|
-
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Same building
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Parking available
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1
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1
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Floor level
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high
|
high
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Exterior (Building)
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Floor to Ceiling Glass
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Floor to Ceiling Glass
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View
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Full Marina View
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Full Marina View
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Question 1 Do your research using the following website to determine the gross annual rent (AED) for properties (A) and (B)
Question 2- Using the market value approach, find the value of the property (A) (Suppose that the price listed is the selling price).
Question 3- Using the income capitalization approach, find the value of the property (A).
Question 4- The current owner of property (A) bought 4 new from Emaar in 2010 at 1,000,000 AED. In 2010, construction costs (including partial value of the land) of the apartment by Emaar were 750,000 AED. It would cost Emaar 1,100,000 AED to reproduce the same apartment today (including the partial value of land). In addition, the owner did an upgrade to the apartment this year (upgrade cost: 50,000 AED). The property has depreciated since 2010 by 150,000 AED. Using cost approach, find the value of property (A).
Question 5- Which approach the bank is most likely to adopt? Justify your answer.
Question 6- How much loan should the bank advance in the Loan to Value Ratio (LVR) is 80%?