LIPPO-MAPLETREE - Lippo Malls Indonesia Retail Trust - Investor ...

Appendix EReport No.017/WPA-Report/2007Page 33.As for the shopping centers under BOT arrangements, since we are considering the leasehold interest upto the expiry of the BOT tenure, the sixth year’s net income is not capitalized at a single capitalization rate toperpetuity in view that the Properties may be surrendered to the land owner at the end of the BOT tenure,hence, the Properties may not have a terminal disposal capital value per se as would have been the casefor the shopping centers held under HGB titles. In order to arrive at the fifth year’s terminal capitalizedvalue for the BOT properties for the remaining years of the BOT period, we have capitalized the sixth year’snet income using dual capitalization rates i.e. a generally accepted terminal capitalization rate for similarproperties held under HGB title, which takes into account a sinking fund provision in order to recoup theinitial capital outlay at the end of the BOT period.The conversion of projected annual income streams into an estimate of the total present value is byapplication of a 14% annual discount rate based on our assessment of the current market requirementsand the local property market conditions for an investment return over a five-year period from suchproperties located in Indonesia.We have also taken into account annual capital expenditure which is to be deducted from the projectedannual rental income streams. Provision for capital expenditure is essential in order to maintain theProperties at a reasonable condition and to keep up with its current competition level in the market.Investment MethodIn the Investment Method, the estimated gross revenue has been adjusted to reflect an ongoing vacancyand subject to an operating company will manage the shopping centers and absorb all operating expensesto arrive at a net income. Gross revenue comprises rental from existing tenancies, potential future incomefrom existing vacant units and turnover and other income of the Properties. Other income is in respect ofsundry (e.g. license fees, rentals of atrium/kiosks, etc.) and car park income.The net income of the shopping centers held with HGB titles and/or with freehold strata title or itsequivalent is capitalized at a capitalization rate which is appropriate for the type of use, tenure andreflective of the quality of the investment, based on analysis of yields reflected in the sales of comparableproperty types. Whilst, the net income of the shopping centers held under BOTarrangements is capitalizedusing dual capitalization rates i.e. a generally accepted terminal capitalization rate for similar propertiesheld under HGB title, which takes into account a sinking fund provision in order to recoup the initial capitaloutlay at the end of the BOT period.Capital adjustments such as letting up allowance, capital expenditure provisions and capitalized rentalreversions, royalty fees and/or other payments associated with the BOT agreements and the addendumsto the land owners where applicable are then made to derive the capital value of the Properties.E-34Continue to page 34.