Strategic Management Assignment – Sample Solution
SECTION 1: Introduction
This is a strategic management report where me as a consultant providing advice to my industrial client who wishes to diversify their strategic portfolio by acquiring a company that currently owns thirty (30) residential properties in the suburbs of Kingsbury, Preston, Bundoora, and West Heidelberg immediately surrounding the La Trobe University Bundoora Campus. The properties are all be four (4) bedroom, two (2) bathroom townhouses and houses, and currently service the student accommodation market.
To diversify portfolio is a strategy that combines a broad range of investments within a single portfolio. This is a strategic management practice that incorporates different assets into one investment in order to produce higher returns. This report highlights that in order to achieve an above average return, the client needs advice on whether they should place all thirty (30) properties under the management of a real estate agent, or place them on AirBnB, or split the portfolio between a real estate agent and AirBnB. Moreover, the revenue projection period for this task is one year which comprises of 52 weeks.
This report comprises of seven sections. Section 1 introduces the report. Section 2 provides the knowledge regarding market research and efficiency figure of the client’s properties. Section 3 describes client’s portfolio in detail. Section 4 and 5 presents the demonstration of revenues and costs. Section 6 deals with overall net position followed by section 7 that deals with conclusions and recommendations to the client.
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SECTION 2: Market research and efficiency figure of the properties
This section involves market research related to the properties and develop the efficiency figure of any properties listed on AirBnB. Market research involve the understanding of the concepts such as median house price and median rental price. The median house or rental price is the midway point of all houses that have been priced at market level or rented for a specified duration.
Based on research, it is concluded that every single AirBnB property is not booked 100% of the time; thus, I found that AirBnB property is booked 3 days out of 7 days in a week, making efficiency figure of 42.85%. This efficiency figure is calculated as:
[(3/7)*100] = 42.85
However, the efficiency figure for agency-managed properties is a static i.e. 90% as already given in the assignment instructions.
The figures in this report are based on market research performed from realestate.com and airbnb.com. While doing research from realestate.com, it is true that figures are real except in the case of Heidelberg West where a synthetic number was used because of lack of data as indicated in Fig 8. Whereas in the case of AirBnB, all the data is synthetic based on the estimated data availability on the airbnb.com.
SECTION 3: Client’s Portfolio
My client is an industrial person that has 30 houses, each of which are 4 bedroom 2 bathroom homes in the following 4 suburbs:
- Bundoora
- Kingsbury
- Preston
- Heidelberg West
The first one is Bundoora that has 136 properties available for rent. The Bundoora map and its median property price is represented in the Fig 1 and Fig 2.
(https://www.realestate.com.au/neighbourhoods/bundoora-3083-vic)
Figure 2: Bundoora Median Property Price
(https://www.realestate.com.au/neighbourhoods/bundoora-3083-vic)
Kingsbury has 14 properties available for rent. The Kingsbury map and its median property price is represented in the Fig 3 and Fig 4.
Figure 3: Kingsbury Map
(https://www.realestate.com.au/neighbourhoods/kingsbury-3083-vic)
Figure 4: Kingsbury Median Property Prices
(https://www.realestate.com.au/neighbourhoods/kingsbury-3083-vic)
Preston has 128 properties available for rent. The Preston map and its median property price is represented in the Fig 5 and Fig 6.
(https://www.realestate.com.au/neighbourhoods/preston-3072-vic)
Figure 6: Preston Median Property Prices
(https://www.realestate.com.au/neighbourhoods/preston-3072-vic)
Heidelberg West has 23 properties available for rent. The Heidelberg West map and its median property price is represented in the Fig 7 and Fig 8.
Figure 7: Heidelberg West Map
(https://www.realestate.com.au/neighbourhoods/heidelberg-west-3081-vic)
Figure 8: Heidelberg West Median Property Prices
(https://www.realestate.com.au/neighbourhoods/heidelberg-west-3081-vic)
I have split the houses into 50-50, so that 15 houses are of agency-managed and 15 houses are of AirBnB and both have same ratio of division of houses in each suburbs. 5 houses are in Bundoora, 4 houses are in Kingsbury, 3 houses are in Preston and 3 houses are in Heidelberg West.
Graph 1: Agency-Managed division of Houses
Graph 2: AirBnB Managed division of Houses
However, the mode of tendency was charge per house because it is easily manageable.
Graph 3: Housing Split between Agency-Managed and AirBnB Managed
SECTION 4: Demonstration of revenues
This section demonstrate the calculations regarding the revenues associated with agency-managed properties and AirBnB managed properties. Moreover, for the agency-managed portfolio, weekly median rent for all four types of suburbs was taken from realestate.com except for the weekly median rent for Heidelberg West because data did not exist for weekly median rent for Heidelberg West on realestate.com that’s why I used the best guess and estimate the median rent value for Heidelberg West in accordance with the other properties median rent value.
Table 1: Demonstration of revenues of Agency-managed properties
Data is extracted from realestate.com
Table 2: Demonstration of revenues of AirBnB managed properties
The data presented in table 1 and 2 illustrates that while AirBnB houses seem to potentially generate significantly more median rent per week and their lower efficiency figure contributed in this regards.Data is extracted from AirBnB.com
SECTION 5: Demonstration of costs
This section includes the demonstration of costs such as the money charged by real estate agents typically charge for managing rental properties, as well as the percentage that AirBnB takes from users. The property management fees charge by real estate agent is around 10% and AirBnB charges hosts a 3% fees which pretty low as compared to real estate agent fees. So, for agency-managed properties, after agency fees is (100% – 10% = 90%) and for AirBnB managed property, after AirBnB fees is (100% – 3% = 97%).
Table 3: Demonstration of costs of Agency-managed properties
Table 4: Demonstration of costs of AirBnB managed properties
SECTION 6: Overall net position
This section demonstrates my industrial client’s final net position which total revenue minus all the costs. After agency fees and after AirBnB fees, the total value of revenue is for 1 week. So, in order to calculate the overall net position for both types of properties for 1 year, multiple the after agency fees total and after AirBnB fees total with 52 because there are 52 weeks in 1 year. These values are shown in Table 5 and 6 as below:
Table 5: Overall net position of Agency-managed properties
Table 6: Overall net position of AirBnB managed properties
SECTION 7: Conclusion and Recommendations to the client
This section discuss the conclusion and recommendations for the client. After doing whole calculations for both types of properties, it is evident that the AirBnB managed properties are more profitable and have more strategic importance as compared to agency-managed properties because of various reasons such as AirBnB charges only 3% fees whereas real estate agent fees is 10% which is more than 3 times higher than what AirBnB charges. The other reason is that the overall net position of AirBnB is better than Agency-managed properties as shown in table 5 and 6.
Therefore, my recommendations to the client is to invest more in AirBnB managed properties because AirBnB charges less fees as compared to agency-managed properties and earned more revenue as a result. For higher return, my client can split house into 90-10. Hence, 90% investment in AirBnB and 10% investment in Agency-managed properties.
