Nearly every asset we own undergoes wear and tear with use. That shiny smartphone you use is prone to cracks, slowing down, or becoming obsolete with time. Your new car will endure some damage with miles being added to it. All the goods we own decrease in value due to time and use. This is referred to as depreciation. This is why trying to resell a pre-owned asset will likely fetch you less money than the amount you paid to acquire it. Do all assets undergo depreciation? Does your real estate property undergo depreciation too? Does depreciation on apartments reflect a loss in asset value?
Why is a real estate considered an investment if it declines in value? Let us take a look.
Do all assets depreciate in value?
The depreciation of an asset is closely tied to its value or use to generate income. When the value of any asset starts to reduce over time, leading to its replacement, this is a depreciating asset. When the asset's intrinsic value does not reduce over time, it is a non-depreciating asset. Let us understand this with some examples. Land, the cash you have in hand, your gold jewellery, art by famous painters - these do not lose their value over time. They do not depreciate. The building you have constructed on the land or the flat you have bought will, however, lose value due to the onslaught of weather and natural elements, wear and tear, and usage. This means that in the case of your apartment, the land value keeps appreciating while the flat may depreciate through the years.
What does Property Depreciation Mean?
When you invest in an apartment or a building, it is important to consider the depreciation of the property with time. This depreciation is a function of the age of the structure. This means the older the building or apartment, the more the depreciation. Does this mean that all apartments lose value on resale? This is not true. In fact, in cities like Mumbai, investors sell their apartments at a considerably higher price than the amount they invested. Here are some factors that influence depreciation.
Factors Influencing Depreciation
- Age of Construction: Buildings and apartments lose value with time due to the physical deterioration of the structure. Paint starts wearing off, the cement and brick could chip away, elevators may require repair or replacement, and cracks may appear with time. This directly impacts the value of the property in terms of its durability. With age, maintenance costs also tend to increase.
- Location and Infrastructure: Location is a very important factor that influences depreciation. A structure built in a location where it is exposed to extreme heat, cold, rain, and hail will undergo degeneration more quickly than one exposed to equitable weather conditions. Similarly, a building in an urban area with great drainage systems will depreciate less than one in a place which floods every year. The location of garbage dumps, slums, and polluting factories or industries nearby also hastens structural damage and depreciation in value.
How is Property Depreciation Calculated?
To calculate the depreciation of a constructed property value, you must consider three important factors - the age of the construction and the useful age of the structure, and the land value. The formula used to calculate the depreciation alone is as follows -
Age of the construction ÷ Useful age of the structure
So, if the estimated useful age of the structure is about 60 years and the building was constructed about 20 years ago, the depreciation in value is 20÷60 = 1/3. So, if the building construction costs about INR 90 lakhs, the structure value now is 90-(1/3*90) = INR 60 lakhs.
To calculate the property value, you must add the current land value to this amount.
Depreciation on Apartments
The depreciation of apartments depends on two factors -
- Maintenance of the property
- Land availability
Properties that have been maintained consistently and repair undertaken consistently may depreciate less than others. In fact, according to experts, buildings with poor maintenance may depreciate up to 40% more. This determines the resale value of your apartment.
The availability of land for development in a particular area may influence the value of your apartment. For example, the appreciation in land value of your apartment in Mumbai may be more than the depreciation of the structure. This means that a resale can fetch you a profit over the amount you invested in your apartment.
The value of a residential apartment quickly appreciates when the locality or neighbourhood undergoes rapid development. However, the quality of construction also plays a very important role in the value of the apartment. This means it is very important to undertake adequate research in selecting the locality and developer for your real estate project. Your Blox relationship manager can help you in making the right choice.
