Commercial Property - To sell or keep ?

Scenario...

...£100k to £250k...

...doesn't make sense.

You missed a bit...

Based purely on the merits of the above figures, could anyone make an argument for selling the freehold at that price? Where could one invest £500k for a guaranteed return of £38,500 plus capital growth in-line with the property market?

Cheers.

If the experts only reckon it's worth at most 250,000, sell it, there must be some reason that they so hugely undervalue it compared to both the purchaser and the "guaranteed" rate of return, either these professionals are completely incompetent, or the guarantee is nothing like as guaranteed as you're making out.

Your figures do not make sense, so check them, and then people can maybe give sensible advice.

Jim.

Gah.. ffs.. Why do people *always* feel the need to read between the lines and look for something which isn't there.

Right, forget the lower valuation.

Property worth £500k with a rental income of £40k p/a on a 25 year lease with a middle risk (in terms of long term prospects) leisure company. The leisure company wants to buy the property.

Would you sell or keep drawing the rent?

I'd draw the rent. It's worth £40k pa to rent, and on the basis of that, I'd say it should be worth a hell of a lot more than £500k to buy, unless you have a reliable crystal ball to advise you on capital growth. Presumably the 25-year rental agreement has an escalator clause, so that the 40k isn't fixed for the whole 25 years, but will be linked to some agreed index or other.

On the basis of *no* capital growth, and no escalator clause, the property will still be worth £500k in 25 years, and you'll have had £1000k worth of rent.

If you invest 40k pa at, say, 5%pa, for 25 years, it'll be worth roughly £2000k, so if you rent it, you'll be worth £2500k at the end.

If you invest £500k at 5%pa for 25 years, it'll be worth only £1700k.

So you'd be £800k better off by not selling. To break even, a fairer price now would be about £750k. But note that's still under the assumption of no capital growth in the property value.

The more capital growth you expect, the higher the price now should be, because you need to be compensated now for agreeing to miss out on the gain in value which after a sale will accrue to the purchaser.

I think they're trying to take you for a mug.

Why did you exclude *falls* in capital in line with the property market?

That is my view.

"Upwards only" rent reviews every five years.

I had it at about £800k, and even then, I still think I'm better off keeping the property, unless I could buy another one in a better location.

I think they are just trying to buy the property, but I take your point.

Because historically, in the area where the property is, that has

Now re-do the figures if you get, on average, 10%pa over the next 25 years :- [Don't forget that a 5%pa average, for a term of a full 25 years, has not been seen historically for a long time.]

If you invest 40k pa at, say, 10%pa, for 25 years, it'll be worth roughly 4300k, so if you rent it, you'll be worth 4800k at the end.

If you invest 500k at 10%pa for 25 years, it'll be worth 5400k.

That's 600K better off at the end of 25 years, from *selling* now.

You think the property will still be worth £500k in 25 years? I reckon it'll be worth at least £2000k and probably a lot more.

"Mike" wrote

It wasn't my assumption - it was Ronald's, which I was happy to go along with to keep consistency between the two sets of calculations.

Even if you add X,000 to each set of calculations, the comparison will still be the same.

"Mike" wrote

That'd be 5.7%+pa, then.

True.. My mistake.

Capital growth is automatic when keeping the property. An invested sum needs to return enough to cover capital growth + income so that both increase at least in line with RPI.

To match the return I will get with the property, interest rates would have to return an average rate far higher than has ever been previously sustained over the long term.