An investor is considering buying a property with a 92 year lease. The property is tenanted with a current rental income of 4,500 per month payable monthly in advance. Expenses for management and maintenance are 13,000 per year payable quarterly in arrears.

1. (a) Determine the value of the property assuming an effective interest rate of 2.5% per annum. Assume that neither rent nor expenses increase. [6]

2. (b) Assume now that rents are reviewed every 3 years and the next review is in 2 years time. Determine the maximum price that the investor should offer to achieve a pre-tax return of 5% per annum, assuming that the rate of future rental increase will be 2% per annum and that expenses do not increase.