You need to study a property over an extended period of time to get an idea of whether it truly makes its owner happy or not. Rarely, if ever, are the life- cycles of real properties documented. Instead, assumptions regarding the remaining useful life of a given building tend to be hypothetical in nature. Owners will unanimously tell you that re-letting a “good” property will never be an issue.
Taking a close look at a well-known high-rise in Frankfurt, recently dismantled down to its core and shell, will make you think again.
Built in 1972, it was initially used by a bank. When the financial institution moved out in the early 1990s, the building was bought by an open-ended real estate fund and subjected to a fully-fledged overhaul. It became the first property in Germany to realise a square-metre rent of more than 100 DEM per month (if for a partial floor area only). It was a significant moment in Frankfurt’s 1992 real estate market. Assuming a sustainable rent of 100 DEM per square metre, if the building had been valued at the time it would have been worth 24,000 DEM (nearly 12,000 EUR) per square metre. It’s now embarking on its second full-scale revitalization. This begs the question what would the property be worth now, in 2012.
If you were caught up in the rather linear mindset of the real estate industry typified as a ‘90s minset, you would have assumed that there would always be a market for this kind of office scheme, given its (unmatchable) prime location and the superior development of its floor space to meet the latest tenant requirements. With the price tag in mind, you would not have dared to reflect that properties become obsolete, that tenant requirements are subject to change, that technological progress continues, and that locational quality may shift. So, you would have been likely to assume that there is no good reason why the rent should not keep going up in steady increments, apace with inflation at the very least. Accordingly, you would have had reason to believe that the real-term monetary value of the 1992 rent rate would amount to 70 € per square metre by 2012, and that the property value, assuming an identical cap rate, would come to approx. 16,800 € per square metre.
This is clearly not what happened:
- The main tenants moved out as early as 2007.
- Thereafter, the property stood vacant.
- The distribution paid by the property has most likely been less than 5 percent over the past 20 years, especially when you take non-recoverable service charges, maintenance and all the rest of it into account.
- The property was first sold to a hedge fund as part of a package deal, then resold to a develop