[머니 컨설팅]Interest rates cut, commercial real estate investment needs attention | Dong-A Ilbo

As the base interest rate was lowered by 0.25%P,
Increased interest in commercial real estate instead of financial products
In the process of estimating real estate value,
Need to calculate rental income-return ratio

Q. Mr. A, who is in his 70s and lives in the metropolitan area, is currently looking for an investment that can generate stable profits. Coincidentally, a real estate agent’s office recommended that commercial complex B, which can collect rent of 10 million won per month, was listed for 2.8 billion won. Mr. A has no history of investing in commercial properties, so he is wondering whether 2.8 billion won is an appropriate price.

Yuna Jeong, Real Estate Researcher at NH Investment & Securities Tax Center A. Commercial real estate is attracting attention again as the Bank of Korea lowered its benchmark interest rate by 0.25 percentage points for the first time in 38 months at the Monetary Policy Committee meeting on the 11th of this month. This is because loan interest rates are lowered, which reduces interest costs and increases rental yields. As the rate of return on financial products other than stocks has decreased, the investment attractiveness of commercial real estate has become relatively more attractive.

The value of your investments is determined by the income you receive from your assets. For example, if you invest 1 billion won in a deposit with an annual interest rate of 3%, you will generate interest income of 30 million won (before tax) per year. Let’s think about it the other way. Assuming an interest rate of 3%, how do we calculate the value of a financial product that provides 30 million won every year? Annual income of 30 million won divided by 3% equals 1 billion won. The 3% figure derived here is called the ‘Capitalization Rate’ in commercial real estate. Ultimately, the return rate can be defined as the expected rate of return from the perspective of a commercial real estate investor.

The method of evaluating the value of the content just mentioned is called the ‘revenue return method.’ The profit reduction method calculates the current price by returning the net profit that a real estate asset is expected to generate in the future. To express it in a formula, it can be written as ‘real estate price (value) = income / conversion rate.’

When investing in commercial real estate, the income is rental income. When rental income increases or the conversion rate decreases, real estate prices rise, and conversely, when rental income decreases or the conversion rate increases, real estate prices fall.

Now, let’s calculate the appropriate price for shopping mall B that Mr. A was offered. Let’s assume that the monthly rent for the commercial space in question is 10 million won (assuming management fees are included), the deposit is 120 million won, and the sale price is 2.8 billion won. In order to estimate the return rate of a commercial building, the process of investigating the prices, rents, deposits, etc. of other buildings traded nearby must also be conducted in parallel.

First, let’s calculate the net operating profit of shopping mall B. By adding annual rental income (KRW 120 million) and deposit operation income (KRW 3.6 million, assuming a 3% annual rate of return), the total operating income (KRW 123.6 million) can be obtained. Now we have to exclude operating costs here, which usually account for about 8 to 15% of total operating income depending on the management method. If operating costs are calculated by applying 10%, which is the average of the area where Shopping Mall B is located, the result is 12.36 million won. In conclusion, the net operating profit of Shopping Mall B, which excludes operating expenses (KRW 12.36 million) from total operating income (KRW 123.6 million), can be estimated at KRW 111.24 million.

Now that we have calculated the net operating profit, it is time to calculate the return rate. As previously mentioned, the conversion rate for each individual item is the net operating profit for each item divided by the sale price. The problem is that there is considerable variation among commercial properties. Considering this, it is reasonable to use the ‘average reduction rate’ of similar products in the same area as Shopping Mall B. As detailed in the table, the reduction rate of nearby buildings C, D, and E is 3.8% on average. If this reduction rate and net operating profit estimate are applied to the profit reduction method formula, the appropriate price (value) of shopping mall B can be considered to be 2.89996 billion won.

Therefore, it can be estimated that if Mr. A purchases shopping mall B for 2.8 billion won, he will receive a profit of about 99.96 million won.

However, it is important to note that in this case, individual variables such as loan, depreciation of building, and time value of money were not considered. Even taking this into account, if you can calculate ‘net operating profit’ and ‘return ratio’ by adding revenue and subtracting costs, you can easily find the fair value of commercial real estate.

Money Consulting >

SubscribeSubscribe

I also recommend these subscriptions!

• 

  interview

• 

  Content that goes beyond boundaries

• 

  At Gwanghwamun

Yuna Jeong, Real Estate Researcher at NH Investment & Securities Tax Center

• great
  0dog

• I’m sad
  0dog

• I’m angry
  0dog

• I recommend it
  dog