We have received an unsolicited offer for one of our Hong Kong properties. While we usually purchase with the intention of retaining properties for long term income, we recognise that there will be properties which, for one reason or another, should be sold.
While the property's location should make it an easy property to keep rented, we see limited upside - some of the expectations that contributed to our decision to buy this property have not eventuated and the ability to add value is questionable. We also see better opportunities elsewhere. As there is a sitting tenant who has paid the rent on time every month without fail and has never called us with maintenance requests, we are under no pressure to sell or even to make a decision: it's easy to procrastinate when the cash flow is positive and is expected to modestly increase when the current lease expires at the end of this year.
With an offer on the table, we need to reach a conclusion.
Our choices are:
1. keep the property and defer making a decision until the existing lease expires at the end of 2007. Options then would include (i) negotiating a higher rent with the existing tenant (ii) selling vacant as is or (iii) doing a substantial redecoration and then either renting or selling; or
2. accept the offer. Our annualised IRR would be 11.95%. The IRR calculation (done using a somewhat crude spread sheet) takes into account all revenues, costs and expenses and is based on the negotiated price being at the price offered by the potential purchaser. It is pre-tax (although only the rent is subject to tax). This is acceptable if unspectacular.
We could market the property now, but (i) selling tenanted residential properties is harder than selling vacant ones and (ii) the time taken to market may be longer than the purchaser is willing to wait.
Current thinking is to try and negotiate a better price and then to accept the offer. However, we need to do more research on (i) comparable sales and (ii) alternative investments before calling it a definitive conclusion. While the sale prices can be obtained easily enough that information needs to be supplemented by additional information such as (i) interior fit out and (ii) outlook. We have some ideas for alternative property investments, but need to to some more homework before committing to them.
Of course, the other factor is that the "offer" is an oral expression of interest. Unless and until it is put to us in writing it is not an offer at all.