Simulation to estimate rational prices of Prism plots
Dear All
Like many of you (followers of this discussion forum), I am a real estate investor and prospective buyer waiting for
prices to come down to rational levels before making my intended investment(s). As part of the preparatory work and capitalizing on my limited financial and investment analysis skills, I did a simple simulation to try to estimate “target return based” fair prices for canal plots in Prism today.
The methodology adopted for this simulation is that after a certain number of years (holding period), prism will develop into a mature phase (say like DHA Phase-5 today) and upon reaching such maturity, prices of plots in Prism will be comparable to current prices in Phase-5 adjusted for inflation during the holding period. By assuming certain average inflation rate per year and current estimated prices in Phase-5, we can project the potential prism prices at the end of the holding period. By discounting the value of the plot at the end of the holding period at the target rate of return per year, we can estimate what is maximum price we should pay for the plot today in order to achieve the target rate of return. The development charges yet to be paid are also taken into consideration as additional cost for buyer in this analysis along with transaction costs (agent fees, taxes etc.).
For the sake of this simulation, canal plots in prism are divided into five categories which are (i) best locations, (ii) great locations, (iii) good locations, (iv) average locations and (v) poor locations.
The analysis is done based on US dollar values as inflation rate is more predictable.
Following are the key assumptions for the analysis:
- Current plot prices in Phase-5 for above categories are (i) Best at US$ 355 thousand, (ii) great at US$ 315 thousand, (iii) good at US$ 280 thousand, (iv) average at US$ 240 thousand and (v) poor at US$ 200 thousand
- Annual growth (inflation) of above mature prices is assumed at 2.5%
- Target rate of return is assumed at 10% per year
- Holding period is assumed at 15 years (estimated time for Prism to reach the maturity level in which Phase-5 is today)
Based on the above assumptions, the maximum prices (including transaction charges) which may be rational to pay today for the five categories of plots in Prism to achieve the target return are estimated as (i) best at US$ 110 thousand, (ii) great at US$ 95 thousand, (iii) good at US$ 85 thousand, (iv) average at US$ 70 thousand and (v) poor at US$ 56 thousand.
I thought of sharing the above analysis with other readers of this forum with the hope that it may help other potential buyers like me to make a bit more informed and rational decision based on some degree of analysis