A Lusaka Businessman is considering a real estate investment
so as to take advantage of the ever-rising demand for student
accommodation in the City. A six-roomed house, strategically
located between University of Lusaka and University of Zambia, is
on the market.
He is likely to get it at K200,000 in addition to a further
K50,000 that will immediately be spent on modifications to the
kitchen, livingroom, and toilets to accommodate the additional
usage. Under the most likely scenario, the remaining four rooms
will each accommodate two bed spaces. Each bed space will yield
K500 per month after recovering all expenses.
Assuming full occupancy throughout the year and a growth rate
in line with GDP growth of 4% per year in property values and an
inflation annual adjustment of 6% in net rentals:
a) Calculate the expected annual returns for each year over a
five year holding period.
10 Mks
b) What is the annual average return over the holding
period?
05 Mks
c) What is the investment’s average annual compound
return?
05 Mks
d) Comment on the relationship of (B) and (C).
10 Mks
e) Calculate the investment’s volatility over the
period.