The Next Nail in the Coffin

Thrugelmir

westernpromise wrote: »

So spend EUR 100 million on flats in a market where prices don't go up and you can knock 2.5% of that off the rental income every year (and loan interest or bond payments as well). That leaves you cashflow positive but with very little net profit on which you can be taxed.

A building is a wasting asset. The land is where the value is.

cells

Thrugelmir wrote: »

A building is a wasting asset. The land is where the value is.

unless that land is in stoke-on-trent where there is no value in the land

westernpromise

Building economics are quite interesting I think. If you do the NPV of the cashflow from anything using a realistic discount rate you find that money earned in more than 20 years' time has basically nil value today.

Hence if you're putting up a commercial building such as a block of flats or an office, you have to be able to construct it for less than the NPV of the meaningful future rents (i.e. 20-odd years' worth) because that's all it's worth spending on the building.

Presumably you write off the construction costs against the rents (or whoever buys the building off you writes the purchase price off against them) over a similar time scale. So if you're writing off over say 30 years, max, I struggle to see how that rental cashflow ever falls subject to any tax, given typical yields. You must have an offset equivalent to almost the whole rent until rents climb in the later years, at which point you put another one up to eliminate a looming tax liability.

At no stage in the process does any corporate landlord put up a building an individual occupant can ever buy.

cells

NPV of future cashflow out a few decades meaning nothing (worthless) is one of the reasons why developed economies will tend towards zero real rates and stay there.

chewmylegoff

westernpromise wrote: »

Building economics are quite interesting I think. If you do the NPV of the cashflow from anything using a realistic discount rate you find that money earned in more than 20 years' time has basically nil value today.

Hence if you're putting up a commercial building such as a block of flats or an office, you have to be able to construct it for less than the NPV of the meaningful future rents (i.e. 20-odd years' worth) because that's all it's worth spending on the building.

Presumably you write off the construction costs against the rents (or whoever buys the building off you writes the purchase price off against them) over a similar time scale. So if you're writing off over say 30 years, max, I struggle to see how that rental cashflow ever falls subject to any tax, given typical yields. You must have an offset equivalent to almost the whole rent until rents climb in the later years, at which point you put another one up to eliminate a looming tax liability.

At no stage in the process does any corporate landlord put up a building an individual occupant can ever buy.

The construction cost of a commercial property cannot be written off as a tax deductible item and no capital allowances are available either. The cost is deducted from sales proceeds when you sell the building in order to calculate the gain chargeable to corporation tax.

I think most developers that build large commercial properties prefer to try to find a tenant (or tenants) to agree to take out a long lease on the building or a major part of it before they even start building it and then they sell the building (before construction has finished) on to an asset manager which runs a commercial property fund.

Generali

cells wrote: »

NPV of future cashflow out a few decades meaning nothing (worthless) is one of the reasons why developed economies will tend towards zero real rates and stay there.

The NPV of cashflows in many decades is always zero. That doesn't mean that long term interest rates should be zero at all.

westernpromise

chewmylegoff wrote: »

The construction cost of a commercial property cannot be written off as a tax deductible item and no capital allowances are available either. The cost is deducted from sales proceeds when you sell the building in order to calculate the gain chargeable to corporation tax.

I think most developers that build large commercial properties prefer to try to find a tenant (or tenants) to agree to take out a long lease on the building or a major part of it before they even start building it and then they sell the building (before construction has finished) on to an asset manager which runs a commercial property fund.

German corporate landlords get to write off depreciation against rent, however, which isn't the same thing as writing the actual construction cost off to tax.

cells

Generali wrote: »

The NPV of cashflows in many decades is always zero. That doesn't mean that long term interest rates should be zero at all.

Its zero at a high interest rate it's not zero at a low or zero interest rate

Think logically. Is there no value on the latter half of infrastructure that lasts 50-100 years? That's what high rates entice the economy to believe.

michaels

westernpromise wrote: »

Building economics are quite interesting I think. If you do the NPV of the cashflow from anything using a realistic discount rate you find that money earned in more than 20 years' time has basically nil value today.

Doesn't that maths only work if you assume rent payments are costant in nominal terms. If they increase at the same rate per annum as the discount rate applied then won't each year of rent have the same value today?

cells

michaels wrote: »

Doesn't that maths only work if you assume rent payments are costant in nominal terms. If they increase at the same rate per annum as the discount rate applied then won't each year of rent have the same value today?

And does that not imply the rate used is zero in real terms?