The economics of extending a lease

System

I think if you can mortgage to do it the opportunity cost is less
One stock is too narrow an example, something diversified has better odds

Should you diversify away from property seen as most of your wealth is in property form? Food, tobacco, energy and weapons are quite reliable defensive investments

GreatApe

Thrugelmir wrote: »

Why should they?

Share price was 1275p in 2007. Around 618p at close today.

Dividend growth in recent years is at best in line with CPI.

Currently out of 7 major broking firms. 6 rate BL as a hold, 1 as a sell. Nothing to suggest that the share price has the ability to rise 7-9% this year.

They had a 2 for 3 rights issue in Feb 2009 at 225p a share.

What that means is if you held the shares at that time you were issued 2 shares for each 3 you owned, at 225p a share you are up about £4 a share for those shares

So lets say you owned 1 million shares in the year 2000 price was about £4.10 = £4.1 million
Come 2009 you paid £2.25 a share for the rights issue shares and got 666,666 shares which cost you £1.5 million and you then had 1.666 million shares

Today your 1.666 million shares are worth £10.333 million

So you started with £4.1 million in 2000
Added £1.5 million in 2009
And now its worth £10.33 million

and it has consistently paid out dividends over those 17-18 years. Sometimes as low as 3% and sometimes nearly 10%.

GreatApe

GreatApe wrote: »

started with £4.1 million in 2000
Added £1.5 million in 2009
And now its worth £10.33 million

and it has consistently paid out dividends over those 17-18 years. Sometimes as low as 3% and sometimes nearly 10%.

BOE calculator says 55% inflation since 2000 or 2.8% a year

Therefore the shares are actually worth 25% more than just inflation increases

So not only did the company pay dividends they also best inflation during that time by 1.4%

So 5% divi + 1.4% above inflation share price increase = 6.4% real return compounded over the last 17 years.

economic

Thrugelmir wrote: »

Why should they?

Share price was 1275p in 2007. Around 618p at close today.

Dividend growth in recent years is at best in line with CPI.

Currently out of 7 major broking firms. 6 rate BL as a hold, 1 as a sell. Nothing to suggest that the share price has the ability to rise 7-9% this year.

and nothing to suggest it wont either. and we all know broking firms are right, right?

economic

GreatApe wrote: »

BOE calculator says 55% inflation since 2000 or 2.8% a year

Therefore the shares are actually worth 25% more than just inflation increases

So not only did the company pay dividends they also best inflation during that time by 1.4%

So 5% divi + 1.4% above inflation share price increase = 6.4% real return compounded over the last 17 years.

and they still remain "undervalued" relative to book value by around 30%.

Thrugelmir

GreatApe wrote: »

BOE calculator says 55% inflation since 2000 or 2.8% a year

Therefore the shares are actually worth 25% more than just inflation increases

So not only did the company pay dividends they also best inflation during that time by 1.4%

So 5% divi + 1.4% above inflation share price increase = 6.4% real return compounded over the last 17 years.

Hindsight is a wonderful human invention. Trouble is crystal ball gazing is what's required. You are investing today. Not in 2002.

For the 5 years ended 31/03/2017. The share hasn't yielded close to 5%. In 2015 was only 3.3% and in 2016 only 4% respectively.

GreatApe

economic wrote: »

and they still remain "undervalued" relative to book value by around 30%.

Yes due to Brexit the shares are trading below book value,

They have announced a £300 million buyback after having sold one of their properties for more than book value. Anyway this wasn't really about BLND.

You have a flat I believe, is the lease short by which I mean how many years left for it to get to the magic 80 year length? If so what do you make of the discussion about extending or not?

GreatApe

Thrugelmir wrote: »

Hindsight is a wonderful human invention. Trouble is crystal ball gazing is what's required. You are investing today. Not in 2002.

For the 5 years ended 31/03/2017. The share hasn't yielded close to 5%. In 2015 was only 3.3% and in 2016 only 4% respectively.

Well yes I do not know what the shares will do over the next 100 years I only presented what I think is a very neutral case, that the shares will just track inflation and the dividends will be the real return. That should be a very vanilla assumption. Of course the shares could under perform or over perform

I used British land as an example as I was talking about extending a lease for a flat or not extending it and putting the money into shares. I picked British land as it is also property vs the flat which is property to try and keep it as close to apples to apples as possible.

GreatApe

Thrugelmir wrote: »

For the 5 years ended 31/03/2017. The share hasn't yielded close to 5%. In 2015 was only 3.3% and in 2016 only 4% respectively.

That is not important as the decision is based on todays price and at todays price it is a 5% yield stock. So putting £13k into shares, like BLND or even a tracker for the FTSE 100 vs extending the lease. At the end of 90 years which is the better option?

It seems almost absurd to assume that not extending a lease and letting it expire could be the better financial decision but that is what the mathematics suggests could be the case.

EDIT: Oh I see what you mean we need to reinvest the dividends and you are saying the dividends might not always be this high. That is true but the only way for that to happen is that the share price increases so the dividend effectively falls relative to the higher share price. If that happens you are not at a loss because you could sell up the shares. So if the shares go from £6 to £9 over the next year it is correct that it will no longer yield 5% but your £13k investment would be worth about £20.5k at the end of the year and you could sell up and extend the lease at that point for £13.5k making £7k.

System

Extending a lease could have a negative opportunity cost, in that it then enables you to remortgage that you otherwise wouldnt be able to do. And potentially you could release more than the extension cost (perhaps later on)