nottheaverageactuary

Actuarial news and views from Cape Town and beyond

Guinness’ Factory long term Lease

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If someone offered you a 9000 year lease on a 4 acre piece of land (roughly 2.5 rugby fields) for £45 a year, would you take it? Using a discount rate of 6%, 1.3% higher than the latest inflation estimate in South Africa, the present value of this lease is a mere £795.

Surely you would think anyone would be crazy to offer this kind of price. However, this offer was made to Arthur Guinness in 1759, for the use of an unused brewery in Dublin, Ireland. This brewery is the original site for the famous Guinness brewery, which would later become the largest brewery in the world.

In 1759, the concept of inflation was unheard of. In fact, the fist monetary systems that targeted price levels were only proposed following the First World War. For this reason, the original lease offered to Guinness included no allowance to increase the price.

This price, although not insignificant, was still cheaper than relative prices today. The best estimates I could find for the value of £45 pounds in 1759 in today’s terms ranged between £5 840 using the retail price index and £76 000 using average earnings. While this may seem a large amount for a piece of land smaller than the Green Mile, to buy 1 acre of industrial land in Doncaster, England, would set you back £225 000.

Unfortunately, or fortunately if you take the perspective of the leaser, Guinness bought out the land under the lease before they could benefit from inflation. The best estimate I could find for the time of this buy out is before 1868.

-As an interesting aside, it was Guinness who commissioned William Gosset in 1899 to carry out statistical analysis for them, during which time he developed the t-distribution and the t-test under the pseudonym “Student”.

http://www.measuringworth.com/ppoweruk/result.php?use%5B%5D=CPI&use%5B%5D=NOMINALEARN&year_early=1759&pound71=45&shilling71=&pence71=&amount=45&year_source=1759&year_result=2013

http://www.rightmove.co.uk/commercial-property-for-sale/property-37645669.html

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