. (a) Examine the principles of good property investment with respect to the out-of-town retail development.
Regular and Secure Income
Regular and secure income is important for the investors. In this case, the location is an important aspect. Although the development is located out-of-town, but the location is strategic because it is nearby to the town, for example Klang. For the retail development, when the retailer is renting a shop, he or she will only spend a lesser amount of money compared to the town area. This can help them to save their cost, resulting in more profit. It can also be their advantage to sell their products or services cheaper, attracting more people to visit their shop. For Mr Alex Pang, it is a good thing because this could attract more retailer and thus make sure that the income is regular and secure. He does not need to worry about the other existing retail centre, since there is demand because of the growth in economy.
Future Income and Capital Growth
In the case, as an area nearby to the town, the out-of-town retail development is consider a good choice and have huge potential in the future. It is because the area is located nearby to several important places. It can be a benefit for the retailer because their product might be delivered through Port Klang or airport. This is also an attraction to the retailer. When there is demand from the retailer, future income will be secured as many will grab the chance to rent the retail developed by him. As for capital growth, it can be defined as increase in the value of asset over time. This can be guaranteed as mentioned above, the rental will be increased since the demand is high. The value of the land of the area will increase when the economy of the area become better.
Protection Against Inflation
Inflation happens where the price for goods and services is increasing. In this case, the retail development is not directly affected by inflation. Normally, the rental of the retail center will increase following the increase of price of good. As mentioned above, when the price of products and services that the retailer provided is lower than the town, then people will still and continue to come despite of inflation since it is nearby to the town. Mr Alex Pang could also increase the rental reasonably, helping the retailer in the other way.
3. (b) Demonstrate your understanding of the concept of yield for the proposed out-of-town retail development by giving an example.
Yield is the most important in any investment. It is the solely reason an investor invest in a project or a development, looking for the return in long haul. It is the net annual income return which expressed in the form of percentage of the market price of the asset. In the other word, yield is the return of an investment.
The significant difference between prime and secondary location is the rental and asset value which affect the yield greatly. Let us see the difference of prime and secondary location based on the examples, the figures stated below is just an assumption.
Yield =(Annual Rental)/(Asset Value) x 100%
Rental : RM 12,000.00 per month
Asset Value : RM 4,000,000.00
Yield = (RM 12,000 x 12)/(RM 4,000,000) x 100%
Rental : RM 9,500.00 per month
Asset Value : RM 1,500,000.00
Yield = (RM 9,500 x 12)/(RM 1,500,000) x 100%
There are several factors that could affect the yield. It includes purchase price, current rent, expected rise in rent as a result of rise in demand, rent review frequency, condition of the property, development possibility and so on. As you can see from the example above, the yield is affected by the rental and the asset value. Although the rental is higher at the prime location, but it does not mean that yield will be higher in prime location. It is because the value of asset is also high at prime location. At the prime location, the shop is nearby to the main road which can be seen and reached easily. It makes the asset value higher, the investor will need to pay more money compared to secondary location. The asset value could be increased when the retail center is having a good image because of the good business. When we are calculating the yield, it will be lower in prime location. Although the increase in rental could also increase the yield, but it could cause bad effect to the investor. It is because the retailer will not renew the contract once it end.