Once the decision to move has been made, it makes sense to calculate both rental and purchase options
Many companies willing to move ask themselves what is more economical: purchase or long-term rental? To support this decision, a large Berlin company commissioned the bulwiengesa appraisal. Especially for this purpose, our appraisers developed a comprehensive scenario analysis, which compares the payment flows and includes numerous factors.
For private individuals and companies alike, the question can be a headache: Does it make sense to buy a new property in times of low interest rates and apparently constantly rising rents? Or is it perhaps more sensible to rent? This question always has to be answered individually and depends strongly on one's own planning, financial performance and the attractiveness of the property. For commercial users, it is ultimately a monetary decision, for which, however, numerous aspects must be taken into account and scenarios must be calculated.
The Initial Situation
The Berlin-based company had already found a property that seemed suitable in terms of location, size and functionality. Now an agreement was to be signed with the developer at short notice, covering both purchase and rental. Our subsidiary for valuations, bulwiengesa appraisal GmbH, was commissioned with a market value assessment and a scenario analysis for the investment decision. The period under consideration for the cash flows should be 25 years.
Within the scope of the analysis were conducted:
- a market and location analysis using the RIWIS database of bulwiengesa AG,
- a market value assessment by bulwiengesa appraisal GmbH for the fictitiously developed project and
- a scenario analysis, likewise by bulwiengesa appraisal GmbH.
The scenario analysis is based on
- an estimate of the rent development in the Berlin office market and the submarket in which the client's desired property is located,
- an estimate of the vacancy rate development and forecast of the volume of new construction in Berlin and this submarket, and
- the derivation of object-related costs,
- consideration of financing costs and
- Consideration of opportunity costs.
In order to help the client to make a decision when weighing up purchase vs. rent, we have modeled all payment flows that flow in the case of a fictitious rental relationship as well as in the case of a fictitious purchase, using a complete financial plan.
The rental scenario considers, in short, the rental cost trend and the return on equity. In the purchase scenario, the core components are the property costs and income, borrowing costs and the cost and return on equity.
The cash flows of the rental and purchase scenarios were compared and compared based on a complete finance plan. An important component here is the return on debt and equity.
The results are presented for the years 2035 and 2045, from which our recommendations are derived.
Our client ended up with a comprehensive analytical answer to the initial question - or rather an answer matrix. This is because the results of the analysis are naturally not the same at every point in time or for every holding period. The results depend, among other things, on a change in the purchase price in the coming years, the market value, the interest on equity and debt capital or a possible change in the customer's space requirements. In this case, we have made our recommendations depending on the customer's self-imposed priorities, such as willingness to take risks or required flexibility.
Note: Everything about bulwiengesa appraisal GmbH can be found on the website.
Contact person: Sven Carstensen, member of the board at bulwiengesa and managing director bulwiengesa appraisal, carstensen [at] bulwiengesa.de