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Recall that we discussed the following issues in class: On Friday, we will do an Excel exercise on leaseholds. Please read this article. The author
Recall that we discussed the following issues in class: "On Friday, we will do an Excel exercise on leaseholds. Please read this article. The author makes the following statement: "a flat in Central London with an 88-year lease would sell for 97 per cent of its full market price but the same flat with 22 years on the lease would sell for only 56 per cent and with a ten-year lease for 32 per cent." Can you make sense of these numbers? It may help to use a simple example. Say there is no inflation, the interest rate is 4% and rent Ris due at the beginning of each year. What is the 'full market value'? What is the value of a 88-year lease? Can you get a number close to 97%?" For your Excel journal, I would like you to report the following: Assume there is no inflation and the real interest rate is 4%. Assume furthermore that the flat earns you a rent of one pound at the beginning of each year. (a) Compute the discount factor for year 0, 1, 2, ..., 150. (b) What is the present value of the receiving the rent from 88 years? Explain how you would compute this value using (1) the discount factors you just computed and (2) the formulas from class. Check that you obtain the same result. (c) What is the present value of receiving the rent forever (use the formula from class). Call this the full market value. (d) At 4% interest rate, how much does a 88-year lease sell as a percentage of its full market value? What about a 22 year lease? 10 year lease? (e) How do these values change when the interest rate is 3%? 5%? (Bonus points) What interest rate did the author use for the article? Recall that we discussed the following issues in class: "On Friday, we will do an Excel exercise on leaseholds. Please read this article. The author makes the following statement: "a flat in Central London with an 88-year lease would sell for 97 per cent of its full market price but the same flat with 22 years on the lease would sell for only 56 per cent and with a ten-year lease for 32 per cent." Can you make sense of these numbers? It may help to use a simple example. Say there is no inflation, the interest rate is 4% and rent Ris due at the beginning of each year. What is the 'full market value'? What is the value of a 88-year lease? Can you get a number close to 97%?" For your Excel journal, I would like you to report the following: Assume there is no inflation and the real interest rate is 4%. Assume furthermore that the flat earns you a rent of one pound at the beginning of each year. (a) Compute the discount factor for year 0, 1, 2, ..., 150. (b) What is the present value of the receiving the rent from 88 years? Explain how you would compute this value using (1) the discount factors you just computed and (2) the formulas from class. Check that you obtain the same result. (c) What is the present value of receiving the rent forever (use the formula from class). Call this the full market value. (d) At 4% interest rate, how much does a 88-year lease sell as a percentage of its full market value? What about a 22 year lease? 10 year lease? (e) How do these values change when the interest rate is 3%? 5%? (Bonus points) What interest rate did the author use for the article
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