Real estate consists of retail spaces, warehouses, and land. It is located on the side of the main road that goes through Liepaja which is 3rd largest city in Latvia. For retail space (572 m2) there is a rent agreement in place until 2025. The loan will be used to purchase ½ of deemed shares for the real estate.
We evaluate this project with a grade A. The
Company has a great deal coming, which it can either sell later, invest and reconstruct,
or keep as it is and earn from rent agreements. Based on the communication with
management of the Company, it is planned to invest in reconstruction and make first
floor warehouses as offices or small retail shops for renting. The Company should
have enough income to cover monthly interest rates and within two-year time,
the management would like to sell this property or refinance it in a bank.
A 3-storey building was built in 1980. The total area of the building is 3502m2, of which 1397m2 ground floor (leasable 1010m2), 2106m2 second and third floor combined, including terraces of 471,5m2. The Purchased will be the first floor of the building and ½ of deemed shares for the real estate.
- The real estate is located in the central part of Liepaja city and located on the main street that cross Liepaja
- The building has 3 stories and was built in 1980.
- Strategically its location is great and can be easy accessed from any part of the city.
- Cars can be parked in the property or municipal parking.
- The new owner has a plan to invest in first floor reconstruction (unused area) of the building to create it more appealing and to lease it.
- The first floor of the building can be rented to one or several tenants
- It has centralised city utilities
- It is possible to park vehicles on the street
- Only ½ of deemed shares for the property can be acquired
- Second owner of the deemed shares could start disputing with the Company
Part of the previously described property is evaluated at 320 000 EUR. In the calculation for the rent income is used actual data
according to the rent agreement, but for the warehouses – 1 EUR m2. Expense is
calculated at approx. 30% of the income, leaving with 30 000 EUR net
income. Terminal value is calculated at the end of second year. In the
calculation is used 10% capitalisation and 10% discount rate. We consider that the valuation is very conservative and although we do not
have access to precise calculations, the valuator has considered this property as too risky –
due to its location and condition. |
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If simplified
– the first to face price increase are manufacturers, who cannot purchase raw
materials for the same price as before. Second are retailers, who cannot
purchase stock, because manufacturers have increased their prices. Third
are consumers. Commercial real estate owners faces inflation when tenants have difficulties in paying
rent (because money is spent to run the business), and when the energy or management
expense increases.
As can be observed in the table on the right – inflation has been driven by other segments than retail primarily, as it does not increase as steep as inflation. However, the correlation between inflation and retail sector turnover is 84%, meaning that there is a strong correlation between these data. Usually the food retail revenue is not hit hard for long, if the economy shrinks or inflation rises. If the consumer wants to buy the same 10 things now as 1 year ago, then they will pay more money for those same things. However, most probably they will buy less, but at higher prices. This also shifts spending patterns - consumers are more likely to forgo non-food and luxury items in order to afford food items. Retail sector is earning by adding overheads and markup to the purchase price. As there currently is high inflation period, it is crucial that retailers follow the prices of products and acts immediately by increasing the price. The same is for real estate management – it is crucial to add to the agreements clause of rent increase at least for the same amount the consumer prices have risen over the past year. | ![]() |