Originally Posted by
DW
Thanks for the comments and inputs thus far. I have this mini "situation" which I came across and would like to seek some views from fellow forummers here. I keep to the key points so that its easier to read
+ Unit is about 3.4psf/month
+ Owner is selling with tenancy, left 1.5 years.
+ Based on the PSF level demanded (owner refused to back down anymore after several discussions), unlevered yield net of (i) property tax, (ii) annual maintenance, (iii) cash tax for the relevant tax bracket is less than 2.5%!!
+ Return on equity (based on current rates) is 4.5% but this plunges very quickly as soon as SOR/SIBOR starts to rise. A sensitivity on increase in SIBOR/SOR of 50bps is a 1.5% reduction (i.e. drops to 3.1%!!!) on ROE. This is no surprise. This yield analysis is important, to the extent, it relates to the period prior to maturity of the lease.
+ Owner mentioned there is an option provision in the tenancy agreement whcih can be exercised at the discretion of the tenant. When asked about the details, agents hardly know anything about it and owner is not keen to show the terms of the tenancy agreement. Owner is ONLY willing to show the tenancy agreement after they received the 1% (which does not help or offer any protection, as the money would have been out of the door by then).
+ If you look at AAA/AA+ grade (senior) corporate bonds can easily you about 6% off the secondary market now. Tenor for these bonds are about 2-2.5 years left. Unrated (but good underlyings) corporate bonds can yield about 8+%. Comparing the above property with alternate investments in the wholesale market makes my heart cringe... ...
+ I do like this unit, but the above economics just make the deal less interesting.
Anyone has similar situation before ??? Its a case where you like it but the rational mind tells you not to....