Question 1
An office is held on a 15-year lease with 2 years unexpired; the contract rent is
£
1,275,000 p.a. Improvements were carried out 4 years ago at a current cost of
£25,500,000, increasing the rent by 25%. The market rent, including improvements
is £2,250,000
p.a. The RV is £1,750,000. The target rate of return is 6%, the
capitalisation rate is 3.5% (implying rental growth of 2.7% p.a.). Assume
construction cost inflation of 3% p.a.
Value the landlord's interest in the property assuming four scenarios:
a) the tenant vacates at the end of the existing lease;
b)
c)
d)
a new ten-year lease with a rent review in year 5 (with a clause stating
that the value of improvements is disregarded) is granted to the existing
tenant on expiry;
the landlord repossesses the property for his own occupation; and
the landlord repossesses the property for redevelopment, site value is
estimated at £58,250,000.