Valuation question, page-2

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When conducting a DCF analysis for this industrial ground lease asset in Sydney, the key inputs (growth rates, discount rate) should reflect the lease structure, market conditions, and risks specific to the asset. Below is a structured approach with rationale and recommended ranges for your inputs:

1. Growth Rate for the Asset (Terminal Value / Residual Land Value)

• Focus: The residual land value at lease expiry (Year 29) will depend on Sydney’s long-term industrial land appreciation and development potential.

• Recommended Range: 3.0–4.5% annual growth (nominal).

• Rationale:

  • Industrial land near Sydney CBD has historically appreciated at ~4–6% p.a. due to scarcity and demand from logistics/e-commerce.

  • Moderate this to 3.0–4.5% to account for cyclical risks, potential oversupply, and inflation expectations over 29 years.

  • Terminal value = Current vacant possession value ($60M)compoundedatthisrate(e.g.,$60M × (1 + 3.5%)²⁹ ≈ $165–200M).

2. Growth Rate for Ground Rent

• Focus: The lease specifies CPI-linked increases + market reviews every 8 years. Model a blended rate.

• Recommended Range: 3.0–4.0% annual growth (nominal).

• Rationale:

  • CPI Component: Australia’s long-term CPI averages 2.5–3.0%.

  • Market Reviews: Sydney industrial rents have grown ~3–5% p.a. over the past decade. At each 8-year review, expect a "catch-up" adjustment if market rents outpace CPI.

  • Blend CPI and market adjustments into a 3.0–4.0% annualized rate.

  • Example: Model $400kescalatingat3.5$1.1M**.

3. Discount Rate

• Focus: Reflects the risk profile of the cash flows (secured ground lease vs. development uncertainty).

• Recommended Range: 7.5–9.5% (nominal, pre-tax).

• Rationale:

  • Risk-Free Rate: ~3.5–4.0% (Australia 10-year bond yield).

  • Risk Premium: Add 4–5% for leasehold illiquidity, tenant credit risk, and long-term uncertainty.

  • Comparables: Sydney industrial asset cap rates are ~5–6%, but ground leases typically demand a higher return due to fixed-term risk.

  • Adjust upward if tenant creditworthiness is weak or lease terms are inflexible.

Key Considerations for Your Model

1. Lease Structure:

   • Model explicit CPI adjustments (e.g., 2.5% p.a.) with a "step-up" at each 8-year market review (e.g., +15–20% if market rents outpace CPI).

   • Confirm if the lease allows for "upward-only" rent adjustments at reviews.

2. Terminal Value Sensitivity:

   • Use a range of growth rates (3.0–4.5%) and test the impact on NPV.

   • Consider a residual cap rate (e.g., 5–6%) for the terminal value instead of pure growth compounding.

3. Tenant Risk:

   • If the tenant is investment-grade (e.g., a logistics giant), use the lower end of the discount rate range (7.5–8.5%).

   • If the tenant is speculative or the lease lacks covenants, use 9.0–9.5%.

4. Development Optionality:

   • The post-lease development potential adds upside but is highly uncertain. You could apply a probability-weighted adjustment to the terminal value (e.g., 50% chance of rezoning success).

Example DCF Inputs

Input	Conservative	Base Case	Aggressive
Ground Rent Growth	3.0%	3.5%	4.0%
Asset Value Growth	3.0%	3.75%	4.5%
Discount Rate	9.5%	8.5%	7.5%

Final Recommendations

• Stress-Test Scenarios: Model downside cases (e.g., CPI at 2%, asset growth at 2.5%, discount rate at 10%).

• Benchmark: Compare your discount rate to yields on ASX-listed industrial REITs (e.g., Goodman Group, Centuria Industrial REIT).

• Consult Data: Use JLL/CBRE industrial market reports for Sydney rent and capital value trends.

This asset’s value hinges on the interplay between stable lease income and long-term development optionality. Conservative assumptions are prudent given the 29-year horizon, but Sydney’s tight industrial land supply supports upside.