Un­der­state­ment of note

Finweek English Edition - - Letters -

HOPE­FULLY, the num­bers quoted in Vic de Klerk’s 6 May Money Clinic re­port of a “R930m buy­ing price” for a 30 000sq m shop­ping mall are in­ac­cu­rate, fail­ing which his “Ex­plain, please” request could be an un­der­state­ment of note.

On those num­bers a leasable square me­tre costs R31 000, which – aside from be­ing grossly over­priced – re­quires an av­er­age net rental of R258,33/sq m to de­liver a 10% year one re­turn. How­ever, for the unini­ti­ated prop­erty in­vestor that sort of av­er­age is sadly far be­yond the realms of smoke and mir­rors.

It ap­pears to be too late for in­vestors to con­duct a re­al­ity check but, viewed from an­other an­gle, if on the bullish as­sump­tion an av­er­age net rental of R115/sq m can be achieved, cap­i­tal­is­ing the in­come at 10% sug­gests a year one in­vest­ment value of around R414m.

A dis­counted cash flow val­u­a­tion may im­prove that value by a few per­cent­age points but, ei­ther way, the num­bers in the re­port if cor­rect im­ply a po­ten­tially painful prop­erty in­vest­ment ex­pe­ri­ence and un­der­line the need for un­so­phis­ti­cated prop­erty in­vestors to un­der­stand the fun­da­men­tal dif­fer­ence be­tween cost and value.

The well-known prop­erty group Rode and As­so­ci­ates did value the prop­erty at around R450m, very close to your es­ti­mates. WANT TO SEE my per­sonal share port­fo­lio? No, no – ev­ery­one would find it a huge joke.

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