TIME: 180 MINUTES
4 June 2012
PLEASE READ THE FOLLOWING INSTRUCTIONS CAREFULLY:
PLEASE DO NOT TURN THIS PAGE OVER UNTIL INSTRUCTED TO DO SO.
Ensure that your name and student number appears on the cover of each Answer Book. Please complete this before the test commences.
Each Section is to be answered in a separate answer book and the answer book must be clearly marked.
All Answers must be done in ink, although workings may be done in pencil.
Show all workings clearly.
You may not write anything in your answer books before the start of the test or once you have been instructed to stop writing.
You must remain seated until every paper has been collected.
The invigilators will answer no questions relating to the paper during the test. Make whatever assumptions you deem appropriate and clearly state these in your answer. Any reasonable assumption will be considered.
This test paper consists of 7 pages including the cover page
Section A: Real Estate, Commodities and Private Equity
Real Estate (20 marks)
Busy Valley is a suburb which contains 1.2 million m2 of office space. The intersection between the Busy Valley office space demand curve and a supply of 1.2 million m2 office space corresponds to a rental of R120/m2, yet the current observed market rental is R150/m2. By considering supply and demand dynamics, explain why this could be the case. (max. 12 lines) (4 marks)
Sadia manages an investment fund with a conservative mandate that primarily seeks to minimise capital losses. She is considering placing a part of the fund in mortgage backed securities, and has to choose between Meridian Tranche B (weighted average LTV of 85%), and Meridian Tranche C (weighted average LTV of 55%). Explain which of the two tranches she should invest in and why. (max. 10 lines).
In 2010 the Wilson Family Trust bought a shopping complex for R30 mn, based on the previous owner’s financial statements which showed a net operating profit of R2.4 mn for 2010. The complex has 2,000 m2 lettable area, and the following information applies to the last 12 months:
Average vacancy rate: 5%
Average rental: R300/m2
Tenant sales: R18,5 mn
Percentage rental: 5%
Operating expenses: R 5,000,000
Determine the value of the property today, assuming that the capitalisation rate has declined by one per cent since 2010. Show all steps for full marks.
Discuss the nature of the instrument through which one can invest in a South African Property Loan Stock company, and mention why this instrument is structured in this way (max 10 lines). (4 marks)
Derek invests R500,000 in property unit trusts instead of in a rentable office. Mention the two main advantages of investing in listed as opposed to direct property. (2 marks)
Other than common area maintenance costs, what other expense is usually recovered from tenants?
Commodities (40 marks)
a) Tumi manages a balanced investment fund and wants to hedge it against inflation. She is considering inflation linked bonds and commodity futures for this purpose. Contrast these two options in a portfolio context with regards to inflation protection. (max. 10 lines) (4 marks)
b) Mike believes that the cobalt price is likely to decrease significantly over the few months. He is currently holding shares in two pure cobalt miners, CobCo and CobaltCo, but wishes to sell one of them. CobaltCo has recently hedged a large part of its annual cobalt production, while CobCo is unhedged. Indicate which of the two shares Mike should sell, and explain why. (max. 10 lines) (4 marks)
c) Explain what causes a commodity to be in backwardation, and draw and explain the relevant price curve. Refer in your explanations to the two counterparties involved...
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