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?
___________________________________________________________________
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 faade, 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?
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

THE COST OF MAINTAINING OLDER BUILDINGS
Briefly discuss what are the cost you need to pay for an older
buildings. (refer:_______________________________________)

1. _____________________________________________________________
_____________________________________________________________
2. _____________________________________________________________
_____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
4. _____________________________________________________________
_____________________________________________________________
5. _____________________________________________________________
_____________________________________________________________





















New Building
Old Building