Investment appraisal: Akwaaba university hostel project

What is it about?

This case study is about GBS Pension Fund that wanted to invest in a Hostel Project in one of the universities in Ghana. Most Universities in Ghana faced an acute shortage of on-campus accommodation. Also, the Government of Ghana, in 2017, implemented a programme to make Senior High School in Ghana free. This was expected to increase the number of students who will enter the existing Universities. The project was therefore seen as strategic, as it would help ease the pressure of on-campus accommodation whilst providing diversification for the pension fund. As part of the investment committee’s quest to improve the skill set available to it, especially in relation to Real Estate investments, Esi Abebrese was appointed as one of the members of the Investment Committee of GSB. Her main task was to collect information on key macroeconomic variables as well as granular information on project costs and revenues and conduct investment appraisal. Esi was scheduled to make a presentation to the Investment Committee on the 15th of October 2019 following which the Committee will debate and make a decision. The project had an estimated cost of GH¢52 million with a total number of 3,424 student beds and ancillary facilities. Undertaking the project required moving funds from investments in money market securities with one of the banks in Ghana. The investments in the money market securities were currently yielding about 16% a year. The determination of the cost of capital was critical and Esi and Nana eventually settled on a long-term weighted average cost of capital (WACC) of 14%. This was after considering the trend of inflation, monetary policy rates, treasury rates, stock market returns and a report on returns on commercial real estate properties in Ghana. An exit capitalisation rate of 20% was also estimated for the purposes of determining the value of the property at the end of the investment horizon. Esi also obtained estimates of cost and revenue for the project and proceeded to carry out a feasibility analysis on the project. This consisted of an NPV analysis and sensitivity analysis on various factors to determine the drivers of project value. The Investment Committee had to take several factors (both Quantitative and Qualitative) into consideration before making a decision. Esi believed that these factors included the diversification of the fund’s assets, the return on investment, potential oversupply of hostel accommodation, the social responsibility of providing student accommodation and the impact of any prolonged shutdown of the University.

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