Condominium unit valuation based on land value, construction costs, etc.

[hyperdimension]

The last two occurrences of "THB / square metre" should just be "THB".

[ThailandLOS]

On 2017-01-05 at 4:17 PM, blackcab said:

Perhaps another way to answer your question is to work backwards from the answer. The largest developers aim to make 25 percent from a new development. They achieve this from having large economies of scale. If they can get 30 per cent, they would be really happy.

 

Indeed they, would 30% is what they usually calculate for gross profit in current projects - at least in BKK.

 

Post expenses for marketing, financial cost, sales gallery etc, they would in most cases be very happy with 20% bottom line.

 

 

[lkn]

1 hour ago, ThailandLOS said:

Indeed they, would 30% is what they usually calculate for gross profit in current projects - at least in BKK.

 

My developer (in Chiang Mai) stated 30% as their profit goal. I had actually thought it would be a little more because if it takes them five years from start to finish then that is only a 5.4% annual yield, but of course if they think it is low risk.

 

Though as an “outsider” (and buyer), to me it seems like the people running the development and sales office don’t do much detailed projection, I say this based on negotiations about price, upgrades, talks with the developer after the purchase (with interest to buy an additional unit), etc.

 

[trogers]

35 minutes ago, lkn said:

 

My developer (in Chiang Mai) stated 30% as their profit goal. I had actually thought it would be a little more because if it takes them five years from start to finish then that is only a 5.4% annual yield, but of course if they think it is low risk.

 

Though as an “outsider” (and buyer), to me it seems like the people running the development and sales office don’t do much detailed projection, I say this based on negotiations about price, upgrades, talks with the developer after the purchase (with interest to buy an additional unit), etc.

 

 

Not really low risk...when there is double digit unsold stock five years after construction completion... ??

[lkn]

13 minutes ago, trogers said:

Not really low risk...when there is double digit unsold stock five years after construction completion... ??

 

As I wrote “if they think it is low risk” — I am sure my developer thought they would have no problem selling their units, once completed, or worst-case, rent out the unsold units, as they are already doing this with units in the Thai quota for some of their other builds, and hence through their glasses, it would be a low-risk investment with an estimated 30% total return.

 

Actual risk probably varies a lot, take Pattaya, as many people love to bring up as a market where supply far outweigh demand (so high-risk, right?). Then look at the Waterfront build which is incomplete and has been stalled for years due to legal issues, and yet out of the 167 or so foreigner quota units, there are zero available for sale through the developer. There are 7 units being resold on Hipflat, but I did not check if it’s in foreign name.

 

So why is that? My guess is because it’s not a 22-30 sq. m. budget condo, my thesis is that risk goes down when quality of build goes up :)

[wordchild]

When I was looking I made myself a good friend of CBRE, and found them very helpful once they got to know me and realized I was a serious buyer. It also helped that, back then, i knew one of the senior CBRE directors socially.

For Bangkok at least, they have a pretty good handle on land values area by area, based on transaction history. Obviously this is not an exact science but its possible to get a reasonable ballpark figure of what say a 2 Rai  plot on soi  Ruam  Rudee close to Ploenchit BTS might be worth if on the market.

[peterb17]

Yikes - who cares.

 

People are just obsessed with the idea of value of property here- you can afford to make yourself a decent home- or not .

 

[ThailandLOS]

1 hour ago, lkn said:

Though as an “outsider” (and buyer), to me it seems like the people running the development and sales office don’t do much detailed projection, I say this based on negotiations about price, upgrades, talks with the developer after the purchase (with interest to buy an additional unit), etc.

 

Well of course it depends on the specific company. The BKK ones I'm working with don't even get to acquire the land unless there is a very detailed feasibility study complete which includes everything -  price per unit type, cost of development/construction and all additional expenses. However, it's quite common that the 'people on the ground', i.e. running project sales are not fully informed on what has been decided upstairs.

 

In BKK and elsewhere the project type is adjusted to the land price, e.g. nobody builds a low/middle end residential tower on a prime spot in let's say Chitlom. it has to be something special that yields a high sqm floor price - especially as building high (more than 40 stories) means additional costs and land sqm prices are now higher than floor sqm prices in most attractive spots.

 

And yes, your assumption that high end development projects sell out faster is correct. So from that perspective it's lower risk, although very few developers in Thailand have the muscles to pull those off, thus reducing competition.

Edited January 8, 2017 by ThailandLOS

[hyperdimension]

On 1/6/2017 at 7:13 AM, trogers said:

I believe the increase in land value would offset the depreciation of the building

 

Here is some analysis I've just done on this.

 

Inputs
Initial total unit value i.e. investment outlay (THB)	10,000,000
Depreciation rate (simple) of unit value excluding land share	2%
Initial land share value as percentage of total unit value	10%
Assumptions
Land value appreciation rate	5%
Calculations
Maximum building age (years)	50
Year	Land share value (THB)	Unit value excluding land share (THB)	Total unit value (THB)	Land share value as percentage of total unit value
0	1,000,000	9,000,000	10,000,000	10.0%
1	1,050,000	8,820,000	9,870,000	10.6%
2	1,102,500	8,640,000	9,742,500	11.3%
3	1,157,625	8,460,000	9,617,625	12.0%
4	1,215,506	8,280,000	9,495,506	12.8%
5	1,276,282	8,100,000	9,376,282	13.6%
6	1,340,096	7,920,000	9,260,096	14.5%
7	1,407,100	7,740,000	9,147,100	15.4%
8	1,477,455	7,560,000	9,037,455	16.3%
9	1,551,328	7,380,000	8,931,328	17.4%
10	1,628,895	7,200,000	8,828,895	18.4%
11	1,710,339	7,020,000	8,730,339	19.6%
12	1,795,856	6,840,000	8,635,856	20.8%
13	1,885,649	6,660,000	8,545,649	22.1%
14	1,979,932	6,480,000	8,459,932	23.4%
15	2,078,928	6,300,000	8,378,928	24.8%
16	2,182,875	6,120,000	8,302,875	26.3%
17	2,292,018	5,940,000	8,232,018	27.8%
18	2,406,619	5,760,000	8,166,619	29.5%
19	2,526,950	5,580,000	8,106,950	31.2%
20	2,653,298	5,400,000	8,053,298	32.9%
21	2,785,963	5,220,000	8,005,963	34.8%
22	2,925,261	5,040,000	7,965,261	36.7%
23	3,071,524	4,860,000	7,931,524	38.7%
24	3,225,100	4,680,000	7,905,100	40.8%
25	3,386,355	4,500,000	7,886,355	42.9%
26	3,555,673	4,320,000	7,875,673	45.1%
27	3,733,456	4,140,000	7,873,456	47.4%
28	3,920,129	3,960,000	7,880,129	49.7%
29	4,116,136	3,780,000	7,896,136	52.1%
30	4,321,942	3,600,000	7,921,942	54.6%
31	4,538,039	3,420,000	7,958,039	57.0%
32	4,764,941	3,240,000	8,004,941	59.5%
33	5,003,189	3,060,000	8,063,189	62.0%
34	5,253,348	2,880,000	8,133,348	64.6%
35	5,516,015	2,700,000	8,216,015	67.1%
36	5,791,816	2,520,000	8,311,816	69.7%
37	6,081,407	2,340,000	8,421,407	72.2%
38	6,385,477	2,160,000	8,545,477	74.7%
39	6,704,751	1,980,000	8,684,751	77.2%
40	7,039,989	1,800,000	8,839,989	79.6%
41	7,391,988	1,620,000	9,011,988	82.0%
42	7,761,588	1,440,000	9,201,588	84.4%
43	8,149,667	1,260,000	9,409,667	86.6%
44	8,557,150	1,080,000	9,637,150	88.8%
45	8,985,008	900,000	9,885,008	90.9%
46	9,434,258	720,000	10,154,258	92.9%
47	9,905,971	540,000	10,445,971	94.8%
48	10,401,270	360,000	10,761,270	96.7%
49	10,921,333	180,000	11,101,333	98.4%
50	11,467,400	0	11,467,400	100.0%
Outputs
Final unit value at building end-of-life (THB)	11,467,400
Annualized compound growth rate	0.27%

 

[hyperdimension]

Here is a chart of the year-by-year breakdown table.

 

Edited January 9, 2017 by hyperdimension

[hyperdimension]

We can see that with an initial 10% land value share, only after the 46th year is the break-even point past. The land share value starts to exceed 50% of total unit value after the 29th year, which results in the total unit value to start to rise from then on.

 

A condominium unit must have at least 8.72% of its value as share of the land in the beginning to reach break-even at the end of a 50-year building lifetime. This was calculated using the formula 1 / (1 + land value appreciation rate)^(maximum building age) = 1 / (1.05)^50.

 

I haven't accounted for economic inflation.

 

So paying too much for the finishing (especially if none of the fixtures contain precious metals or stones) may not be a good long-term investment (unless such excessive expense on finishings can attract a much higher rental rate).

Edited January 9, 2017 by hyperdimension

[trogers]

12 minutes ago, hyperdimension said:

We can see that with an initial 10% land value share, only after the 46th year is the break-even point past. The land share value starts to exceed 50% of total unit value after the 29th year, which results in the total unit value to start to rise from then on.

 

A condominium unit must have at least 8.72% of its value as share of the land in the beginning to reach break-even at the end of a 50-year building lifetime. This was calculated using the formula 1 / (1 + land value appreciation rate)^(maximum building age) = 1 / (1.05)^50.

 

I haven't accounted for economic inflation.

 

So paying too much for the finishing (especially if none of the fixtures contain precious metals or stones) may not be a good long-term investment (unless such excessive expense on finishings can attract a much higher rental rate).

 

This is the reason I avoided buying into President Park in Sukhumvit Soi 24 in 2007. Density is too high, making share of land miniscule...

[hyperdimension]

8 minutes ago, trogers said:

This is the reason I avoided buying into President Park in Sukhumvit Soi 24 in 2007. Density is too high, making share of land miniscule...

 

What percentage of total unit value do new condominiums normally have as land share?

 

I assume that developers don't think at all about maximizing a unit's land share, and simply try to create as much new floor area as optimally possible on top of the real land.

 

Are developers taking advantage of the fact that most buyers don't think about a unit's land share? Are most buyers deceived into thinking that developers' artificially created floors are equivalent to the earth's land? I guess during most of the lifetime of the building they won't be able to tell much difference, other than the fact that they require an elevator to enter the artificially created living space. But eventually, at a building's end-of-life, the artificially created space will be lost and worth 0.

 

[lkn]

34 minutes ago, hyperdimension said:

Are developers taking advantage of the fact that most buyers don't think about a unit's land share? […] eventually, at a building's end-of-life, the artificially created space will be lost and worth 0.

 

People tend to buy a condo so that they do not have to live on the street. You seem to ignore this part, but that is actually where the majority of the value lies (from the POV of the buyer), because no-one needs land, concrete, steel, glass, etc. on its own, they need a place to live, and do not have the time and skill to build from scratch.

 

True that the cost of the condo should be relative to the cost of land plus materials, because if some developer is able to buy land, labour, and materials for say, 20,000 baht per occupied sq. m., but is selling it for 100,000 baht/sq. m., then you can be sure that another developer will copy him and sell it for 90,000 baht/sq. m. and so on, until we get closer to actual cost (at least in a perfect market).

 

[hyperdimension]

22 minutes ago, lkn said:

People tend to buy a condo so that they do not have to live on the street.

 

The next-best alternative to buying to live in for most people is to rent. Only those who cannot afford to even pay rent would end up on the street.

 

22 minutes ago, lkn said:

You seem to ignore this part, but that is actually where the majority of the value lies (from the POV of the buyer), because no-one needs land, concrete, steel, glass, etc. on its own, they need a place to live, and do not have the time and skill to build from scratch.

 

I've only seemed to have ignored it because what I've written so far is in the perspective of investment for people like us.

 

Some smart buyers who do need a place to live may also think about a property purchase as a long-term investment - they would not earn any rent from it (because they would stay in it), but at least in the long term they (or their heirs) may not lose much wealth or may even be ahead, depending on how well they chose to buy. They may understand that paying rent to live in a place is certain loss of wealth, hence their search for a place to buy and live in and possibly grow family wealth. So I think what I've written is also relevant to such people - they should consider how much share of the underlying land they would get to own (and how the value would grow) if they buy a unit in any particular condominium.

 

[hyperdimension]

On 1/7/2017 at 2:10 PM, wordchild said:

Back then ( 6/7 years ago) I found several older condos, and even a couple of newer ones where my estimate of the underlying land value per unit was more than 60% of the offered price. There were even a couple of condos where, at the time, they could have been purchased for little more than the underlying land value per unit. Interestingly in one of these "cheap" condos that I identified I found out that the original developer was busy buying any unit in the building that was offered for sale; so they were likely looking at the same thing I was.

Generally, since then, prices have risen but I think broadly it's still true to say that you get much better "value"  in older low rise units in prime central Bangkok (e.g. Ploenchit area) than you get with newer units in less prime areas ( e.g. Past Soi Thonglor)

 

Even if the land share percentage is high, whether the capital gain will be positive in the end depends a lot on how much life the units have left.

You can use the compound interest formula to determine how much the unit would be worth at the building's end-of-life: Total unit value at end-of-life = land share value now * (1 + land value appreciation rate)^(years of life remaining)

 

If the result is less than the unit's purchase price, then it would be unprofitable (without considering any rental income).

If the result is higher than the unit's purchase price, then it would be profitable, but by how much? You can use this formula and compare with the bank interest rate: Annualized compound growth rate = e^(ln(total unit value at end-of-life / total unit value at purchase) / years of life remaining) - 1

 

Using trogers' earlier example, here is what it looks like in a spreadsheet:

Inputs
total unit value now (THB)	7,500,000
land share value now (THB)	4,000,000
Date built	1991-01-01
Assumptions
Maximum building age (years)	50
Land value annual appreciation rate	5%
Calculations
Duration of building life remaining (years)	24
Outputs
Total unit value at end-of-life (THB)	12,874,559
Annualized compound growth rate	2.28%

 

 

Just changing the date built to 1975 results in capital loss:

Inputs
total unit value now (THB)	7,500,000
land share value now (THB)	4,000,000
Date built	1975-01-01
Assumptions
Maximum building age (years)	50
Land value annual appreciation rate	5%
Calculations
Duration of building life remaining (years)	8
Outputs
Total unit value at end-of-life (THB)	5,894,831
Annualized compound growth rate	-2.98%

 

 

 

Edited January 9, 2017 by hyperdimension

[wordchild]

1 hour ago, hyperdimension said:

 

Even if the land share percentage is high, whether the capital gain will be positive in the end depends a lot on how much life the units have left.

You can use the compound interest formula to determine how much the unit would be worth at the building's end-of-life: Total unit value at end-of-life = land share value now * (1 + land value appreciation rate)^(years of life remaining)

 

If the result is less than the unit's purchase price, then it would be unprofitable (without considering any rental income).

If the result is higher than the unit's purchase price, then it would be profitable, but by how much? You can use this formula and compare with the bank interest rate: Annualized compound growth rate = e^(ln(total unit value at end-of-life / total unit value at purchase) / years of life remaining) - 1

 

Using trogers' earlier example, here is what it looks like in a spreadsheet:

Inputs
total unit value now (THB)	7,500,000
land share value now (THB)	4,000,000
Date built	1991-01-01
Assumptions
Maximum building age (years)	50
Land value annual appreciation rate	5%
Calculations
Duration of building life remaining (years)	24
Outputs
Total unit value at end-of-life (THB)	12,874,559
Annualized compound growth rate	2.28%

 

 

Just changing the date built to 1975 results in capital loss:

Inputs
total unit value now (THB)	7,500,000
land share value now (THB)	4,000,000
Date built	1975-01-01
Assumptions
Maximum building age (years)	50
Land value annual appreciation rate	5%
Calculations
Duration of building life remaining (years)	8
Outputs
Total unit value at end-of-life (THB)	5,894,831
Annualized compound growth rate	-2.98%

 

 

 

when i said "older" units  i was talking about completed around 2003/6 ;so at the time i was looking 3 to 6 years old,  a 10 year old condo is pretty much pre-historic for many Thais.

Off the top of my head i dont know the date of the condominium act but i guess it was sometime during the 1980,s; So nothing before then.   There was a spate of condo development in the period ahead of the Asian Crisis 1997/8, then not much happened (Thai banks were not lending) till around 2003 when things started up again. In my opinion the interesting period is condos that were developed between 2003 and 2009,  layouts tend to be more generous and this was before land prices really started to get ramped up. There are some older condos than this (eg Somkid Gardens) which are of high build quality and well located.

Edited January 9, 2017 by wordchild

[hyperdimension]

38 minutes ago, wordchild said:

when i said "older" units  i was talking about completed around 2003/6 ;so at the time i was looking 3 to 6 years old,  a 10 year old condo is pretty much pre-historic for many Thais.

 

10 years is just 20% into 50-year lifespan of a condominium building. I would have thought over 25 years would be "old".

 

I think you may be referring to style or design, as over a span of 10 years designs would have changed greatly, such that when a Thai looks at a 10-year old unit they would think it's very old-fashioned, compared to the modern creative architecture that we see in new buildings today.

 

At 10 years old, there would be 40 years left for land share value to appreciate. To be breakeven at the building end-of-life, the land share would need to be 14.2% of the total unit value, calculated as 1 / (1 + land value appreciation rate)^(number of years), where land value appreciation rate = 5%. To have capital gain equivalent to 2% bank interest, the land share would need to be 31.4% , calculated as (1 + bank interest rate)^(number of years) / (1 + land value appreciation rate)^(number of years). So if you saw a 10-year old unit having 50% of its price as land share, then that could have been a very good deal.

 

For a condominium already purchased, a valuation based on land share and depreciation can be calculated using this formula:

Total unit value at n years = land share value at 0 years * (1 + land value appreciation rate)^n + unit value excluding land share at 0 years * (1 - unit depreciation rate * n)

 

 

38 minutes ago, wordchild said:

Off the top of my head i dont know the date of the condominium act but i guess it was sometime during the 1980,s; So nothing before then.

 

I think there hasn't been much awareness among condominium buyers about share of land because no condominiums have reached their end-of-life yet. So we'll have to wait and see what happens when the very first condominiums die. Presumably the occupants would be asked to vacate and owners would receive compensation equivalent to their land share value. News of the first condominium deaths would be published, increasing the awareness of the long-term significance of the share of land that condominium units have.

 

[blackcab]

1 hour ago, wordchild said:

Off the top of my head i dont know the date of the condominium act but i guess it was sometime during the 1980,s...

 

Close: 1979.

[trogers]

I believe all condo developments through the different eras are built to maximum sales area and priced to what their respective buyers can afford. No consideration would be given to share of land.

 

Heights of buildings went up due to changes in zoning laws, and the smaller sizing (since  2007) were bank led, as they held the believe that bookings of a project equated to sales...??.

 

Took almost ten years to prove my argument to the bank that bookings don't equate to sales due to the the low down payments encouraging the high entry of flippers.

 

Now developers are lamenting about 50-70% mortgage rejection rates, which Raimon Land warned about a few years ago and raised their requirements on down payments, and now Knight Frank highlighting the climbing risk in new projects.

[trogers]

I predict that the next decade would see a boom in townhouses in the city's outskirts and a glut of Thai-occupied condos, as Thai buyers in the past 5-6 years get married and have children which the shoeboxes cannot accommodate.

 

The progressive completion of the mass transit system would make such a prediction possible.

[lkn]

6 hours ago, hyperdimension said:

I've only seemed to have ignored it because what I've written so far is in the perspective of investment for people like us.

 

But what about rental value? Say you rent it out and net 4% then you break even after 25 years, so why focus on the land value?

 

I would also think that your focus on land value ratio favors cheap construction, because materials + labour are a large part of the price you pay for a condo, and as you want to maximize land value ratio, you indirectly minimize price of materials and labour.

 

Compare a cheaply built concrete house using cinder blocks, plastic window frames, etc. and then one built with bricks and wood, the latter can easily be made to look great even in 100 years (we have many beautiful houses in Europe that are more than a hundred years old), whereas your cheap construction will look like crap, but it will likely have a larger part of the price go to the underlying land.

 

Edited January 9, 2017 by lkn

[trogers]

3 minutes ago, lkn said:

 

But what about rental value? Say you rent it out and net 4% then you break even after 25 years, so why focus on the land value?

 

I would also think that your focus on land value ratio favors cheap construction, because materials + labour are a large part of the price you pay for a condo, and as you want to maximize land value ratio, you indirectly minimize price of materials and labour.

 

Compare a cheaply built concrete house using cinder blocks, plastic window frames, etc. and then one built with bricks and wood, the latter can easily be made to look great even in 100 years (we have many beautiful houses in Europe that are more than a hundred years old), whereas your cheap construction will look like crap, but it will likely have a larger part of the price go to the underlying land.

 

 

Would getting back a 100% of what you put in today, but 25 years in the future a breakeven?

[hyperdimension]

23 minutes ago, lkn said:

But what about rental value? Say you rent it out and net 4% then you break even after 25 years, so why focus on the land value?

 

It doesn't have to be one or the other; you can try to maximize both capital gain and rental income. You can see that I covered both in my first couple of spreadsheet tables. The second last line in each table is the sum of the two.

 

If though you can find a unit from which you can consistently earn extremely high rent, such that you don't have to be concerned about the land share value decades down the road, and are willing to accept some capital loss as the rental income would far offset it, then that can be good too.

 

My latest posts were focused on capital gain only, because I was analyzing the relationship between land share and non-land share components of a unit's total value over time.

 

As long as we understand that the physical unit is eventually going to be worthless when occupants are ordered to vacate, we can decide whether or not we should take that into consideration.

 

A unit without land share could, in effect, be thought of as a 50-year leasehold unit, with lease not extendable.

 

 

23 minutes ago, lkn said:

I would also think that your focus on land value ratio favors cheap construction, because materials + labour are a large part of the price you pay for a condo, and as you want to maximize land value ratio, you indirectly minimize price of materials and labour.

 

Compare a cheaply built concrete house using cinder blocks, plastic window frames, etc. and then one built with bricks and wood, the latter can easily be made to look great even in 100 years (we have many beautiful houses in Europe that are more than a hundred years old), whereas your cheap construction will look like crap, but it will likely have a larger part of the price go to the underlying land.

 

Placing high importance on land share value need not favor poor quality construction. Land share value would be just one of many other factors that should be taken into consideration when purchasing a condominium unit, and construction quality would be one of those other factors. You can choose which factors are most important to you and make investment decisions accordingly. Personally, I use a scoring system with each factor having a weight, then calculate an overall score per property and rank in descending order.

 

Some well-constructed condominiums could last well over the 50 year time span that the Thai Appraisal Foundation has set for the life of a condominium building. Some poorly built buildings may last much less than 50. The longer the lifespan of a condominium, the more time you get for land share value to continue to appreciate, leaving you with more capital in the end, so the construction quality factor complements the land share value factor.

 

[hyperdimension]

11 hours ago, trogers said:

Would getting back a 100% of what you put in today, but 25 years in the future a breakeven?

 

Yes, if you don't consider the time value of money; But it is better to do so to be more realistic.

 

To find the breakeven point whilst accounting for time value of money, first we need to know how much you'd end up with if you instead left the total investment amount in a bank account that earns interest.

Then you need to find the number of years it would take for future value of earning regular rent (and each time you earn you deposit it into a bank account that earns interest) to equal the amount above.

 

With a 4% annual rental yield, I have determined that it would take 35 years for total rental income (including the accumulated interest) to match the same amount as if you instead had deposited the full investment amount into a bank account for the entire duration, assuming a 2% annual bank interest rate.

Edited January 10, 2017 by hyperdimension

[trogers]

12 minutes ago, hyperdimension said:

 

Yes, if you don't consider the time value of money; But it is better to do so to be more realistic.

 

To find the breakeven point whilst accounting for time value of money, first we need to know how much you'd end up with if you instead left the total investment amount in a bank account that earns interest.

Then you need to find the number of years it would take for future value of earning regular rent (and each time you earn you deposit it into a bank account that earns interest) to equal the amount above.

 

With a 4% annual rental yield, I have determined that it would take 35 years for total rental income (including the accumulated interest) to match the same amount as if you instead had deposited the full investment amount into a bank account for the entire duration, assuming a 2% annual bank interest rate.

 

And the usual breakeven return for real estate is 3% point above the bank deposit rate to cover for the illiquidity. In the exercise above, it would be 5%.

[lkn]

 

1 hour ago, hyperdimension said:

With a 4% annual rental yield, I have determined that it would take 35 years for total rental income (including the accumulated interest) to match the same amount as if you instead had deposited the full investment amount into a bank account for the entire duration

 

What sort of bank gives you a yield close to 4%?

 

If you want to do a more realistic model than my simple “break even after 25 years” you should also include rental hikes. I find it unlikely that the rent in 35 years is not higher than today. 4% is also pessimistic, I simply wanted to indicate that “break even on land in 50 years” seems like a strange thing to focus on when rental income should “break even” long before.

 

As for trogers question about whether it is actually break even, there are of course many ways to look at this, but you have gotten your initial capital back in full and you own a condo, so in that sense, you are better off than before you made the investment (regarding assets).

 

But of course opportunity cost and inflation may make you come to another conclusion. I am not making any argument about the sensibility of investing in real estate, as my previous posts should hopefully have made clear, my issue was with the focus on the land ownership ratio.

 

I do not think this is unimportant, but I just think the focus on this part is rather academic and has little connection to where the actual value is when buying a condo.

Edited January 10, 2017 by lkn

[hyperdimension]

9 minutes ago, lkn said:

What sort of bank gives you a yield close to 4%?

 

Probably none (in Thailand), but the major difference between earning bank interest and earning rent is that with a bank account you still have the entire principle in the end, in addition to the interest earned. At the end of life of a condominium, the physical unit itself would be worthless, and you are left with the unit's land share value, which if worth less than the total investment amount of the condominium, would be loss of some principle.

 

 

9 minutes ago, lkn said:

If you want to do a more realistic model than my simple “break even after 25 years” you should also include rental hikes. I find it unlikely that the rent in 35 years is not higher than today.

 

Yes, rent could increase, but that is dependent on real market demand for the particular unit. As a unit ages, it may become increasingly less desirable to the market compared with new units that have much better design and features, limiting the rental rate of the old unit.

 

 

[hyperdimension]

34 minutes ago, lkn said:

 I simply wanted to indicate that “break even on land in 50 years” seems like a strange thing to focus on when rental income should “break even” long before.

 

It would be very relevant to those who buy to live in, as they would not earn rental income. Most owners would want to be left with some value at the end of a unit's life, otherwise it would be just like renting (but paying a lump sum at the beginning).

 

 

34 minutes ago, lkn said:

As for trogers question about whether it is actually break even, there are of course many ways to look at this, but you have gotten your initial capital back in full and you own a condo, so in that sense, you are better off than before you made the investment (regarding assets).

 

You would only "own" the condominium for some time, after which the physical unit will eventually be lost and worth 0 when occupants are forced to vacate. That may be very far into the future, and it may be heirs who would have to go through it, but it's a certainty.

 

 

 

Edited January 10, 2017 by hyperdimension

[trogers]

36 minutes ago, lkn said:

 

 

What sort of bank gives you a yield close to 4%?

 

If you want to do a more realistic model than my simple “break even after 25 years” you should also include rental hikes. I find it unlikely that the rent in 35 years is not higher than today. 4% is also pessimistic, I simply wanted to indicate that “break even on land in 50 years” seems like a strange thing to focus on when rental income should “break even” long before.

 

As for trogers question about whether it is actually break even, there are of course many ways to look at this, but you have gotten your initial capital back in full and you own a condo, so in that sense, you are better off than before you made the investment (regarding assets).

 

But of course opportunity cost and inflation may make you come to another conclusion. I am not making any argument about the sensibility of investing in real estate, as my previous posts should hopefully have made clear, my issue was with the focus on the land ownership ratio.

 

I do not think this is unimportant, but I just think the focus on this part is rather academic and has little connection to where the actual value is when buying a condo.

 

Long term rental projections would assume a flat rental rate.

 

Any future rental increases would be assumed to be absorbed by vacancy periods, maintenance and upgrading the interior over the decades.