Real Estate Investment Corporation is a firm that is principally engaged in the purchase, development, management, and sale of real estate properties, particularly residential properties. It is currently evaluating whether or not to purchase the old ABC Community Hospital, located in the East ABC of Singapore in a neighbourhood undergoing rapid growth and rejuvenation. The ABC Community Hospital operated unprofitably until 2021 when it closed and filed for bankruptcy. Real Estate is considering purchasing the building, converting it to apartment units, and operating it as an apartment complex.

The hospital and its property are currently being offered for sale. Real Estate has performed an extensive evaluation of the site and neighbourhood and has projected the value of the property to be $5 million. After considering its size and location, Real Estate thinks that this is an attractive price and is considering offering to purchase the property at this price. David is in charge of the hospital project for Real Estate. David has thought that this property could be converted into “low-income” apartments. The location seems ideal for such a conversion, and with the potential subsidy from the government housing agency, the remodelling could be quite a profitable investment.

Question 1

After collecting all those information, David is trying to conceptualize his problem. Suppose you were David, how you will analyse the problem.

You are expected to describe and investigate the problem in a more systematic way, and provide answers for:

• What were the key decisions?
• What were the key uncertainties?
• What was the timing of the decisions?
• What was the timing of the resolution of uncertainty?
• What data would he need in order to make an intelligent, defensible decision?

Question 2

Reviewing the past history of LIH applications, David estimated the probability that the application decision would be delayed beyond 60 days to be 20%. David then estimated that the probability that the outcome of the new proposal is favourable is 70%. Given that the outcome of the new proposal was favourable, David estimated that the probability of the LIH plan being approved is 75%; if the outcome were unfavourable, the probability of approval is 30%. Finally, David estimated the probability that the property would still be available for purchase after the policy revision to be 80%.

David next went to work on the financial analysis of the development project. The estimated profit of the new development project under the LIH plan would be $850,000. This value includes the purchase cost of the property, the cost of renovations, annual maintenance costs, annual rental incomes, and applicable tax shelters.

If LIH plan approval were not granted for the project, Real Estate would lose some of the attractive subsidies and tax shelters offered by SGHDA. On the other hand, if Real Estate develops non-subsidized commercial apartments instead, the estimated profit would be $250,000.