Value an ageing warehouse twice at lease expiry, refurbished and as a residual site, and the higher figure is the floor of its price.
An old warehouse is worth less than its land when the residual value of the cleared site, after demolition, a new building and a developer's profit, exceeds what the existing building is worth refurbished and re-let. On an illustrative 20,000 square metre unit at lease expiry the refurbished building is worth €8.54 million against a residual land value of €6.92 million, so the building still adds €1.61 million. The answer flips if new-build rent rises 6.3 per cent, to €90.4 per square metre, or the new-build yield falls 30 basis points.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Ageing logistics buildings are often marketed on their passing rent and a headline yield, as if the building would last forever. The honest floor under the price is the site, and the honest ceiling is what a buyer can do with the building once the lease ends. Comparing the two at the lease expiry date tells you which one you are actually buying.
| Input | Keep and refurbish | Demolish and rebuild |
|---|---|---|
| Floor area, sq m | 20,000 | 22,000 |
| Site coverage | 50% | 55% |
| Rent, € per sq m a year | 48.0 | 85.0 |
| Yield on letting | 7.25% | 5.25% |
| Capex: refurbishment / demolition, € per sq m | 175.0 | 45.0 |
| Construction cost, € per sq m | 700.0 | |
| Fees and external works / contingency | 15% / 5% | |
| Months to letting after expiry | 12 | 15 build + 9 void |
| Rent-free on the new lease, months | 6 | 6 |
| Finance rate / developer's profit on cost | 7.0% / 15% |
The building is let at €60.0 per square metre with three years to run, 25 per cent above the €48.0 the old specification would now command. The refurbished value is discounted from letting back to expiry at 8.5 per cent. Sale costs on the new building are 2 per cent and letting fees 15 per cent of the first year's rent.
Rent = 20,000 × 48.0 = €0.96m; capitalised at 7.25% = €13.24m
Less six months' rent-free (€0.48m) and refurbishment (€3.50m): €9.26m at letting
Discounted twelve months at 8.5%: €8.54m at expiry, €427 per square metre of building
For simplicity this route carries no letting fee or margin on the works. A 15% letting fee would take €0.13m off it, which does not change the answer.
Rent = 22,000 × 85.0 = €1.87m; GDV at 5.25% = €35.62m; net of 2% sale costs €34.91m
Hard costs: demolition 0.90 + build 15.40 + fees and externals 2.31 + contingency 0.77 = €19.38m
Finance on half the hard costs over the build and all of them through the void: €1.87m
Rent-free €0.94m and letting fee €0.28m: total costs excluding land €22.46m
Land is financed for 24 months, a factor of 1.1400, and the scheme must earn 15% on all costs including land:
Land = (34.91 ÷ 1.15 − 22.46) ÷ 1.1400 = €6.92m, €1.73m a hectare
Excel: =(NetGDV/(1+Profit)-Costs)/(1+Rate*Months/12)
At expiry the building route is worth €8.54 million and the land route €6.92 million. The existing building is worth €1.61 million more than the cleared site, about €213 against €173 per square metre of land. So on these figures the old warehouse is still worth more than its land, but by a margin that one assumption can erase.
Seen from today, with three years of passing rent at €1.20 million a year still to collect (€3.06 million discounted), the asset is worth €9.75 million. Valued on the redevelopment route instead, it would be €8.49 million: the choice made at expiry moves today's value by €1.26 million.
| Assumption | Base | Break-even | Move needed |
|---|---|---|---|
| New-build rent, € per sq m | 85.0 | 90.4 | +5.4 |
| New-build yield | 5.25% | 4.95% | −30 bp |
| Construction cost, € per sq m | 700 | 636 | −64 |
| Rent for the old building, € per sq m | 48.0 | 41.4 | −6.6 |
| Rent | 5.00% | 5.25% | 5.75% |
|---|---|---|---|
| 75.0 | 5.09 | 3.92 | 1.87 |
| 80.0 | 6.67 | 5.42 | 3.24 |
| 85.0 | 8.25 | 6.92 | 4.61 |
| 90.0 | 9.84 | 8.43 | 5.98 |
The residual is geared: a 5.9 per cent rise in rent from 85.0 to 90.0 lifts the land value by 21.7 per cent. That gearing is why sites with ageing sheds in strong locations change hands as land long before the building is physically worn out. The building does not deteriorate faster there; the alternative simply gets more valuable.
Curable or incurable. A refurbishment budget can fix roofs, cladding, lighting and docks. It cannot raise the clear height, add yard depth or move columns. When the gap between the old rent and the new-build rent comes from those features, it is incurable, and only the land route recovers it.
Valuing the old warehouse on its passing rent and a yield. Capitalising €1.20 million at 7.25 per cent gives €16.55 million, nearly twice the €8.54 million the building is worth at expiry, because the rent is above what the specification can command and the refurbishment, void and rent-free have not been paid. The yield applies to the re-letting, not to the current lease.
Value an ageing warehouse twice at the lease expiry date: refurbished and re-let, and as a residual site. The higher figure is the floor of its value, and the gap tells you how much of the price is building. The residual method itself is set out in how to calculate residual land value, the coverage that sets the new floor area in how much land a warehouse needs, and the ageing-asset case with its land check in the free workbooks for Logistics and Industrial Real Estate.
Value it at the lease expiry date two ways: refurbished and re-let at the rent its specification can command, net of capex, void and rent-free, and as a cleared site using a residual appraisal of the best new building. In the example these give €8.54 million and €6.92 million; the higher one is the floor of the asset's value.
Because the residual land value is geared to new-build rents and yields. In the example a 5.9 per cent rise in new-build rent, from €85.0 to €90.0 per square metre, lifts the residual by 21.7 per cent, from €6.92 million to €8.43 million, while the old building's value does not move.
Only for the remaining term. Capitalising a €1.20 million passing rent at 7.25 per cent gives €16.55 million, 1.94 times the €8.54 million the building is worth at expiry, because the old specification would let for €48.0, not €60.0, and the refurbishment and void still have to be paid.
This article is one calculation from Logistics and Industrial Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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