You will be informed that one of Norway's largest banks offers different amounts of loans for residential and commercial real estate to be rented out.

For commercial properties, they provide loans of up to 8.5 times the gross rent, while for residential properties, they provide loans of up to 10.5 times the gross rent. The interest rate on both types of loans is 3%. Ignore price increases and taxes when solving the problem.

a)

You are asked to advise a company that uses this bank and are asked to present an analysis of how this affects the profitability of invested equity in the two types of property. The analysis will also discuss the profitability of different price conditions, carry out a most sensitive analysis. Take your own assumptions where needed.

b)

If all the banks followed the same lending practice, use what you have learned in the course to discuss how this will affect the prices of the two types of property.