Valuing the Shard?
My first post here and I thought I would share my thoughts on the Shard (Europes tallest building)
As I walk past London Bridge, an until recently overlooked part of England’s capital, one thing clouds my vision. The Shard. Piercing the sky above and with its 1,000ft height, the shard is undoubtedly the most handsome piece of architecture to grace the capital since the Gherkin and to be honest, the Shard wins hands down.
At the top of the needle sits the view, a beautiful panorama of the Old City, for only £25 a go!
Below that ten flats, one per floor . A breathtaking view from every angle of your own house! If you were thinking of buying one, save your energy – these flats are likely to be the most expensive real estate in London.
Below these, the Shangri-La hotel, the first lease on the building with two hundred rooms and further grand amenities. I think the remaining space is pretty obvious: offices retail blah blah blah.
Every type of real estate (bar storage) can be found here so on top of being the best looking building in the area, it is the first building where people can actually live without going outside!.
The cost?? £450m, funded mainly by the Qatar Investment Authority after the original funders pulled out due to spiralling costs, £450m for just over 1.3m square foot. For all of you property nerds that’s £328 per square foot. Bargain eh?
Well not quite, lets not forget that each distinct floor has different values and so we need to create a sum of the parts valuation for the shard. Before we go into this though, how about a look at it’s competitors?
The Gherkin: Sold in 2006, the Metal Vegetable houses primarily office space but there is an incredible function room at the top. £220m in development costs (Ex finance cost) yielded a price of £595m only 8 years after inception. This makes it a slight cheaper than the Shard yet we need to take into account property inflation
The rest – no spectacular change in price apart from the Heron but granted, the land costs may have been quite a lot more considering it’s central position in London’s square mile.
The Observation Deck
I will start my SOTP (sum of the parts) analysis with the observation business, now you may find this surprising but this business on its own brings in enough cash to pay for nearly 75% of the development. Surprising? I couldn’t believe the numbers myself so I had to do a background check and where best to find a comparison. Well, only the Empire State Building which hosts four million tourists every year and which generates c.£45 million in annual profits!
New York hosts roughly 47m tourists each year while London hosts only 30m and furthermore, there is a lot more culture to see in London than there is in New York. Therefore when estimating the visitor number for the Shard, we have to discount appropriately.
The most profitable viewing based attraction in London is currently the Eye which is visited by 3.5m tourists a year. On the plus side it spins and it’s in the centre of London but on the downside it isn’t that high.
How many tourists will the Shard bring in? If we normalise the Empire State building’s visitor figures for number of tourists, the Shard should see 2.5m entries but due to the fact that it has competition from other attractions (the Eye) I have assumed 2.1m tourists a year.
Ticket prices stand at £24.95 for adults and £18.95 for children. We must also accept the fact that a proportion of these visitors will be on some kind of concession so for the average price per ticket I have taken 70% of the average between adults and children(30% are concessions) . This stands at £15.36.My other assumptions are these: 1% ticket growth per year, discount rate of 10%, 0% ticket inflation rate, 3% cost inflation per year and an intial £2.5m per year costs (staff and power).
For our first year, these 2.1m tourists produce £29m profit and our present value of future cash flows (Assuming no reinvestment) is £324m! This equates to 72% of development costs!
Because of the various unknowns the model is obviously very volatile and if I assume initial visitors to be 1.75m (350k less), the present value drops to £265m. On top of this, if I reduce the discount rate to 8% (it was all cash after all), we find a value of £416m.
Part two is available on my blog but I shall be putting the posts up in tandem. Just an expirement
(google it! I'm not old enough to post links :( )