DEPRECIATION

The diminution in value caused by the physical deterioration and obsolescence a building undergoes during its life. So what cause depreciation?

DEPRECIATION OF BUILDING

Property like any other assets require constant attention in order to preserve its function so that it is always fit for use all the time. If building maintenances is neglected this is what happen:-

The cause of building may varies and for a number of reasons they are listed as follows:

Depreciation deteriorate & obsolete building Depreciate in value

Failure to clean and carry out routine maintenance, Ignoring the causes of deterioration and decay, Poor planning of maintenance, Adopting a negative attitude of waiting until emergency measure are required, Interaction of chemical substance (especially cleaning agents), Chemical that may promote corrosion, Environmental factors such as wind, rain, or sun exposure, Structural elements due to changes in loading, Natural ageing of elements, Changes in climate especially level of moist, temperature and land mass, insufficient allowance for expansion or contraction, absence of weathering, inadequate access for maintenance.

Where are the some examples of depreicated and deterioriated buildings?

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DEPRECIATION – effects on Value and Rent

Depreciation have will affect capital value and rental growth especially for income generating properties. The effects is clearly seen in the graph below:-

At the beginning the property is rented at rack rent which we assume that it is receivable to perpetuity. Assuming that the rent will be reviewed, the step up lines shows rental movement which are reviewed at a constant time period. So in between, the rental will be lower than market rent of which it is a way to ensure stability of capital value. Over time the market rent will increase as so does rental for new properties.

Because older property depreciate thus rental will not be as high as newly developed properties. Until such time where depreciated property losess its economic value, it will have to be re-develop.

Property investment depreciation is a relative concept and has been defined as the fall off in value of an existing property relative to a new property in the same location with a modern specification. 

Rent

Years

Label the above graph – to understand the effects of deprecation

Depreciation in both rental and capital values can be arrested by capital improvements and the ultimate cure for depreciation is to redevelop; although major refurbishment can sometimes also create assets that have similar values to new assets.

Different commercial properties have different characteristics and therefore different depreciation rates.  Depreciation is ultimately tied to buildings which have a finite life, unlike the land element of any property investment.  The standard high street shop unit in good locations within major cities or towns has very high land content in its value. 

It is not uncommon to see buildings hundreds of years old standing next to modern buildings on the high street and given the uniformity of shop fronts it is hard to even notice the age gap.  Annual depreciation and capital expenditure rates for high street shops are therefore very low. 

Offices on the other hand are less location sensitive, have a higher building content relative to land value and have a relatively short life, with high levels of expenditure during that short life.

OBSOLETE

Obsoleces is entirely dependent on human perceptions. Because changes in production factors, obsolete properties (out of date design, unappealing façade, limited spatial consideration) will most likely to hinder prospective tenants.

Example-

The use of shophouse as a place for sales of motor vehicle is getting not so popular compared to purpose built workshops. This may be similar to choice of building specification for office spaces or for dwelling houses.

Question:

Why old buildings have higher outgoings?

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New Building

Old Building

THE COST OF MAINTAINING OLDER BUILDINGS

Briefly discuss what are the cost you need to pay for an older buildings. (refer:_______________________________________)

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