Rental stream valuation

Real Estate
1

Assume you have the following annual rental stream in GBP currency (one line is one year). Assume the income is guaranteed. What value would you give to this (assuming you are buying or selling the rental stream)? Assume income is free of tax.

Year Income GBP
1 500
2 500
3 500
4 500
5 500
6 500
7 500
8 500
9 500
10 500
11 500
12 500
13 500
14 500
15 500
16 500
17 500
18 1000
19 1000
20 1000
21 1000
22 1000
23 1000
24 1000
25 1000
26 1000
27 1000
28 1000
29 1000
30 1000
31 1000
32 1000
33 1000
34 1000
35 1000
36 1000
37 1000
38 1000
39 1000
40 1000
41 1000
42 1000
43 1500
44 1500
45 1500
46 1500
47 1500
48 1500
49 1500
50 1500
51 1500
52 1500
53 1500
54 1500
55 1500
56 1500
57 1500
58 1500
59 1500
60 1500
61 1500
62 1500
63 1500
64 1500
65 1500
66 1500
67 1500
68 2000
69 2000
70 2000
71 2000
72 2000
73 2000
74 2000
75 2000
76 2000
77 2000
78 2000
79 2000
80 2000
81 2000
82 2000
83 2000
84 2000
85 2000
86 2000
87 2000
88 2000
89 2000
90 2000
91 2000
92 2000
93 2500
94 2500
95 2500
96 2500
97 2500
98 2500
99 2500
100 2500
101 2500
102 2500
103 2500
104 2500
105 2500
106 2500
107 2500
108 2500
109 2500
110 2500
111 2500
112 2500
113 2500
114 2500
115 2500
116 2500
117 2500
2

Whats the residual value after year 117? Zero?
Do I understand it right that this revenue stream was post any maintenance cost?

My initial thought was to calculate a Net Present Value at a discountig rate of 7%.
Why 7%:

  • +5.47%: current 30Y UK Gilt Rates
  • (minus) 0.66%: Given long Term Gilt Rates (Y31-117) were probably 1% lower (87/117 of -1%)
  • +1%: Duration Premium given it was a 117 Years Invest
  • +1%: Risk Premium as its not just Gilts but a private Investment

=> this was my walk away

From there, I would clearly want to negotiate some upside. Given the very long duration. Every penny counts a lot. A reduction of the buying price by a fraction of a percent gives you disproportionate, additional benefit.

3 Likes
3

This is pure income with no maintenance or other costs. Residual is zero.

4

Sounds like a reasonably straightforward present value calculation where the cash flows are uneven.

1 Like
5

Yes, but what discount do you use? What do you factor for inflation bearing in mind this is a nominal return which will get trashed if inflation hits.

6

The default approach is to use the risk-free (Treasury) rate. It’s not perfect of course.

1 Like
7

Updated above, 7% as a Minimum. Shoot for 7.1-7.2%

8

Can you securitize this or create a proper investmeent company structure? Question is if you take on co-investors. This is a long shot that can go to zero, or it can go to heaven. Certainly worth a small investtment position I was probably willing to take.

9

I think I got to around the same figuring I’d be willing to sell at 5% and buy at 8% - so around a 6.5%.

10

Wouldn’t it depend on rental yield in the market ?

If normal rental yield is 5% then 20X rent is value of this asset.

1 Like
11

Well, shouldn’t it be an easy Excel exercise?

12

Don’t forget you might have months without tenancy - either due to market / people moving in/out / need for renovation “here and there” in those 120 years.