Target Acquisition Cost

A follower considered investing in a condo in Manila City and asked me for a "ceiling price." I think he was referring to a "target acquisition cost." Here's my reply.

Me: There's no generally accepted "ceiling price"/target acquisition cost for condos. It's all arbitrary and depends on the buyer.

One way to create one is through an income approach.

Get a target yield (e.g., 8% per year). Then, estimate how much the monthly rent is per square meter (e.g., Php700/sqm), and multiply it by 12 months to annualize it.

I prefer being conservative when it comes to estimating the rent. I would use a figure that ensures the unit is never vacant (e.g., Php800/sqm for condos in Makati or BGC and Php400-700 for units outside these CBDs).

Divide the annual rent by your target yield. For example: (700 * 12) / 8% = 105,000. Therefore, your "ceiling price"/target acquisition cost per sqm is Php105,000 per sqm.

What about capital appreciation?

You could also impute the unit's capital appreciation in your computations if you wish. For conservatism, I would only assume 1% to 2%. You can deduct this percentage from your target yield. For example: 8% target yield - 2% annual capital appreciation = 6% target yield.

So your ceiling price increases to = (700 * 12) / 6% = 140,000/sqm.

Why is the capital appreciation so low?

A condo's capital appreciation isn't a straight line moving upwards. Assuming a low capital appreciation allows the possibility of the unit's sale at any time in its life.

Disclaimer: This is a quick and dirty way to determine a target purchase price. It ignores other factors, such as friction costs (capital gains tax, broker's fees, etc.).