A FINANCIAL ANALYSIS OF RETURNS FROM COMMERCIAL REAL ESTATE

PROPERTIES IN THE UNITED STATES

Done for

Project report submitted in partial fulfillment of the requirement of Pondicherry

University for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted By

KARTHIGA. D
(Reg No.1095526)
Under the guidance of

INTERNAL GUIDE: EXTERNAL GUIDE:

Dr. B. CHARUMATHI, Mr. MOHAMED ALI. A.
S
Associate Professor Senior Analyst
Department of Management Studies Zenta Knowledge Services
Pvt Ltd
School of Management Chennai.
Pondicherry University

DEPARTMENT OF MANAGEMENT STUDIES

SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
PUDUCHERRY- 605 014

MARCH- APRIL 2011

 DEPARTMENT OF MANAGEMENT STUDIES
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
PUDUCHERRY-605014

CERTIFICATE

This is to certify that this project entitled “A FINANCIAL ANALYSIS OF RETURNS

FROM COMMERCIAL REAL ESTATE PROPERTIES IN THE UNITED
STATES.” done for ZENTA KNOWLEDGE SERVICES PVT LTD, CHENNAI, is
submitted by KARTHIGA.D, II year MBA (Reg NO. 1095526) to the Department
of Management Studies, School of Management, Pondicherry University in
partial fulfillment of the degree requirement for the award of degree Master of
Business Administration and is certified to be an original and bonafide work.

DR.R.P.RAYA
DR.B.CHARUMATHI
Professor & Head of the Department

Place: Puducherry
Date:

DECLARATION

I, KARTHIGA. D, Student of Department of Management Studies,

Pondicherry University, hereby declare that this project report titled “A
FINANCIAL ANALYSIS OF RETURNS FROM COMMERCIAL
REAL ESTATE PROPERTIES IN THE UNITED STATES” is an
original work done by me and submitted to the Department of
Management Studies, for the award of Master Degree in Business
Administration. I further declare that any part this project itself has not
been submitted elsewhere for award of any degree.

PLACE:

DATE: Signature of the

candidate
 ACKNOWLEDGEMENT

I am indebted to the powerful Almighty God for the blessings he showered on me

and for being with me throughout the study.

I place on record my sincere gratitude and appreciation to my project guide

Dr.B.CHARUMATHI, Reader, Faculty Advisor – Corporate Relations and Placements,
Department of Management Studies, for her kind co-operation and guidance which
enabled me to complete this project.

I express my sincere thanks to Dr. R. P. RAYA, HOD, Department of Management

Studies, School of Management, Pondicherry University, who provided me an
opportunity to do this project.

I am deeply obliged to Mr. MOHAMMED ALI, Senior Analyst,Zenta Knowledge

Services Pvt Ltd, Chennai, for his exemplary guidance and support for this project. I
would also like to extend my thanks to Ms. PRAVINA RAVINDRA, Senior Manager,
Zenta Knowledge Services Pvt Ltd, Chennai, for her support.

I take this opportunity to dedicate this project to my parents who were a constant source
of motivation and I express my deep gratitude for their never ending support and
encouragement during this project.

Finally I thank each and everyone who helped me to complete this project.
 EXECUTIVE SUMMARY

Real Estate in India is investment, but Real Estate in US is business. It is like any stocks,
bonds or any other security. The market for real estate in US is booming over a period of
time. The investment done in US real estate is basically long term and the return is also
high. Real estate finance and Securitization has emerged the driving forces of Real
Estate Industry.

The study emphasizes on valuation of US Real Estate, as the industry is highly organized
and structured, large holdings and that there is a distinct difference between residential
and commercial markets. The trend is also increasing in Indian market. But the
importance given in the Indian market is not as high as compared to the US market. The
level of transparency is high in the US market.

This study is done to analyze the returns and estimate the value of a commercial property
from borrowers and lenders perspective. This valuation is triggered by various factors
and the study considers their influence on valuation.

The major factors influencing the valuation are the property characteristics, the markets
and submarkets, the base rental income, the escalations, the retails sales, Capitalization
rate and the Market leasing assumptions. These factors are considered as most important
with regard to the Real Estate Valuation.

The study is therefore useful for the lenders to determine the value of a property and
calculate the LTV (Loan to Value) and the borrowers to value their property to approach
the Real Estate Financiers.

TABLE OF CONTENTS
CHAPTER DESCRIPTION PAGE NO.

1 INTRODUCTION
1.1Introduction to the topic
1.2 Statement of problem
1.3 Objective of the study
1.4 Period of the study
1.5 Research methodology
1.6 Limitations of the study
1.7 Chapterization
2 PROFILES
2.1 Profile of US Real Estate Industry
2.2 Profile of Zenta
3 INVESTMENT IN REAL ESTATE &
FUNCTIONING OF RE INDUSTRY
4 ANALYSIS & INTERPRETATION
SUMMARY OF FINDINGS,
5 RECOMMENDATIONS &
 CONCLUSIONS
5.1 General findings
5.2 Special findings
5.3 Recommendations
5.4 Conclusion
6 BIBLIOGRAPHY

LIST OF TABLES
 INTRODUCTION

1.1 INTRODUCTION TO THE TOPIC:

Real estate is a legal term that encompasses land along with improvements to the
land, such as buildings, fences, wells and other site improvements that are fixed in
location -- immovable. Real estate law is the body of regulations and legal codes which
pertain to such matters under a particular jurisdiction and include things such as
commercial and residential real property transactions. Real estate is often considered
synonymous with real property, in contrast with personal property.
The real estate industry in the United States mainly deals with three types of
properties namely commercial real estate, residential real estate, and industrial real estate.
This project titled, “A financial Analysis of Returns from Commercial Properties
in the United States” aims to study the factors influencing the US real estate value and the
relationship between those factors and analyzes the various valuation approach that gives
the maximum yield through which the income generation capability of a property can be
determined. There are several factors which determine the value of a property viz., rent,
reimbursement, capital expenditure, probability, inflation, occupancy, location, cost of
capital etc.
1.2 STATEMENT OF PROBLEM
There has been a slowdown in the US real estate market over the last couple of
years. The process of slowdown came into prominence between the late summer of the
year 2005 and summer 2006. The real estate dealers suffered from huge financial loss due
to decrease in sales volume and declining real estate prices. Any collapse of the U.S.
Housing Bubble has a direct impact not only on home valuations, but the nation's
mortgage markets, home builders, real estate, home supply retail outlets, Wall Street
hedge funds held by large institutional investors, and foreign banks, increasing the risk of
a nationwide recession. The housing bubble has been the result of significant increase in
valuations of real estates. In this current scenario, this project aims to determine returns
from commercial properties and estimate the value of properties in the US. The purpose
of this study is to facilitate the investment decision of a client through a risk-return
analysis of the income streams of different Retail properties in the US Real Estate.

1.3 OBJECTIVES OF THE STUDY

• To analyze the returns from various commercial real estate properties to facilitate
the lending decision.
• To arrive at estimates of value of the properties based on the DCF approach.
• To analyze the risk associated with the loan from the lender’s perspective.
• To analyze the credit worthiness of tenants.

1.4 SCOPE
The Scope of the Study is confined to US Retail Properties.

1.5 LIMITATION OF THE STUDY

The major limitations of this research are
 Only secondary data of last 5 years data for US is used for analysis.
 Projections are made only for a period of 5 years.
 This study is confined only to US Real Estate Industry. It gives suggestion
only for investor of the real property in the major cities and markets and
 not for the buyers whose ultimate aim is to buy for living purpose and also
not for brokers of real estate.
 Details such as the client’s name, the property name and address are not
revealed, as it would amount to breach of the confidentiality agreement
between the company and its client.
 Only commercial properties have been focused upon.

1.6 RESEARCH METHODOLOGY

This is a descriptive research which aims at evaluating the returns from a set of
properties.

TOOLS USED
- Loan To Value
- Debt Service Coverage Ratio
- Number of Credit Tenants
- Rollover Risk

1.7 Chapterization:
• The introductory chapter deals with a crisp introduction of US Real Estate
Industry, statement of problem, objectives of study, research methodology and
limitations.

• Chapter 2 portrays the profiles of the US Real Estate Industry and Zenta
Knowledge Services Pvt. Ltd.,

• Investments in Real Estate & functioning of the industry are reviewed in chapter 3

• The data collected were compiled and analyzed in chapter 4.

• Suggestions based on findings emanated from the study were presented in the
concluding chapter 5.