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Makati Grand Palace has been a landmark in the centre of Makati. It has a frontage on Ayala Avenue, the principal shopping street in the town but site also extends back to Makati Avenue. Like many departmental stores it found trading in the current business environment very challenging and the business went into administration in 2018. The administrators were unable to find a buyer for the business though they were able to sell several of other stores owned by the company, which has now been closed for almost two years. The building had suffered from lack of maintenance for many years prior to the store's closure and is now in a poor state of repair. The administrators are now in the process of liquidating the remaining assets of the business, for which the business owned the freehold, on the market. Given its current condition and the lack of demand for departmental stores, it is seen as being a development opportunity. It is unlikely that planning consent will be granted for the demolition of the building given its iconic status. The local authority is likely to insist that the ground floor is retained for commercial uses and specifically retain uses on Ayala Avenue so that this does not undermine the retail core of the town. There may be greater flexibility in the uses permitted on Makati Avenue. PHILGEMS Estates PLC is considering bidding for the building and you have been commissioned to advise on the price that should be offered. IACADEMY Designs has been retained as the design consultant. Their preliminary assessment is that the ground floor can be divided into six retail units. Four of these will have a frontage of 8 meters each on Makati Avenue and a depth of 20 meters. Other two will have a frontage of 16 meters on Makati Avenue and a depth of 14 meters. Although these would be advertised to be let as retail units, the expected tenants are thought to be more likely to be restaurants, fast food outlets, micro- pubs, or even gyms. The upper floors will be developed for residential. IACADEMY Designs advises that 12 apartments of 95 square meters each and four penthouses each of 150 square meters can be created on the upper floors. Market research indicates that Zone A rentals for retail property in Ayala Avenue are P9,500 per square meter and in Makati Avenue P5,500 per square meter. All risks yields for retail properties in Ayala Avenue are 5.5% and in Makati Avenue 6.5%. Each apartment is expected to sell for P3,600,000 and each penthouse for P7,200,000. Construction costs are estimated at P21,000 per square meter. Fees for construction professionals are estimated to be 12.5% construction costs. Legal, land acquisition, and planning costs are 10% of land costs. Letting and marketing costs are expected to be 3% of the gross development value. The scheme will take one year to construct. It is expected that it will take one year from site acquisition to planning and building control approval by the local authority before construction work can commence. Borrowing costs are expected to be 6.5% per annum. The developer seeks to make a profit equivalent to 20% of the gross development value. The local authority expects developers to make a payment of P125,000 per dwelling and P5,000 per square meter of commercial space into its Community infrastructure Fund. The administrators of Makati Grand Palace have decided to market the site through a sealed tender followed by direct negotiation with the winning bidder. a) Advise PHILGEMS Estate PLC as to the maximum price it could afford to bid for the site. b) The administrators of Makati Grand Palace are seeking 40 million for the site. Examine how PHILGEMS Estate PLC might be able to afford to pay this sum. Makati Grand Palace has been a landmark in the centre of Makati. It has a frontage on Ayala Avenue, the principal shopping street in the town but site also extends back to Makati Avenue. Like many departmental stores it found trading in the current business environment very challenging and the business went into administration in 2018. The administrators were unable to find a buyer for the business though they were able to sell several of other stores owned by the company, which has now been closed for almost two years. The building had suffered from lack of maintenance for many years prior to the store's closure and is now in a poor state of repair. The administrators are now in the process of liquidating the remaining assets of the business, for which the business owned the freehold, on the market. Given its current condition and the lack of demand for departmental stores, it is seen as being a development opportunity. It is unlikely that planning consent will be granted for the demolition of the building given its iconic status. The local authority is likely to insist that the ground floor is retained for commercial uses and specifically retain uses on Ayala Avenue so that this does not undermine the retail core of the town. There may be greater flexibility in the uses permitted on Makati Avenue. PHILGEMS Estates PLC is considering bidding for the building and you have been commissioned to advise on the price that should be offered. IACADEMY Designs has been retained as the design consultant. Their preliminary assessment is that the ground floor can be divided into six retail units. Four of these will have a frontage of 8 meters each on Makati Avenue and a depth of 20 meters. Other two will have a frontage of 16 meters on Makati Avenue and a depth of 14 meters. Although these would be advertised to be let as retail units, the expected tenants are thought to be more likely to be restaurants, fast food outlets, micro- pubs, or even gyms. The upper floors will be developed for residential. IACADEMY Designs advises that 12 apartments of 95 square meters each and four penthouses each of 150 square meters can be created on the upper floors. Market research indicates that Zone A rentals for retail property in Ayala Avenue are P9,500 per square meter and in Makati Avenue P5,500 per square meter. All risks yields for retail properties in Ayala Avenue are 5.5% and in Makati Avenue 6.5%. Each apartment is expected to sell for P3,600,000 and each penthouse for P7,200,000. Construction costs are estimated at P21,000 per square meter. Fees for construction professionals are estimated to be 12.5% construction costs. Legal, land acquisition, and planning costs are 10% of land costs. Letting and marketing costs are expected to be 3% of the gross development value. The scheme will take one year to construct. It is expected that it will take one year from site acquisition to planning and building control approval by the local authority before construction work can commence. Borrowing costs are expected to be 6.5% per annum. The developer seeks to make a profit equivalent to 20% of the gross development value. The local authority expects developers to make a payment of P125,000 per dwelling and P5,000 per square meter of commercial space into its Community infrastructure Fund. The administrators of Makati Grand Palace have decided to market the site through a sealed tender followed by direct negotiation with the winning bidder. a) Advise PHILGEMS Estate PLC as to the maximum price it could afford to bid for the site. b) The administrators of Makati Grand Palace are seeking 40 million for the site. Examine how PHILGEMS Estate PLC might be able to afford to pay this sum
