Building Depreciation Versus Land Appreciation

Buildings Can Sometimes Lose Value While Land Investment Values Grow

The characteristics of property that contain buildings are different from undeveloped land. These differences affect value growth of both asset classes.

Real estate investors are growing in number under current economic conditions due to several factors. One is that traditional investments in the stock markets are providing disappointing yields. Another is that real estate overall suffered in the global recession and properties of all types are potentially undervalued.

But land that is undeveloped differs significantly from that which has buildings and infrastructure components (water, waste removal and utilities) and is proving to be one of many viable alternative investments.

So why do changes in the value of undeveloped land not mirror those of developed land.  There are several factors at play here:

•    Simple physics – The principle of atrophy applies very directly to built property. In addition to the costs related to routine maintenance, all buildings require major repairs over time. The costs can be a significant factor on landowners’ balance sheets.

•    Adaptability to market needs at time of sale – In addition to a propensity to age and break down, built property is inherently inflexible. For example, a structure built to be a hospital can only become a residential building with extensive renovations. However, undeveloped property can provide optimal economics to builders, buyers and occupants at key moments. By engineering smart site assembly, the investor can accomplish strategic land development that efficiently meets market needs.

•    No tax benefit to building depreciation – American investors are accustomed to a depreciation formula on investment property, which unfortunately is non-existent in the UK tax laws.

•    The beneficial value of new – Some buyers want to be the designers and first occupants of structures. This is even more pronounced in this era of green building, where structures today are significantly more energy efficient and sustainable than those built as recently as five years ago.

Of course, this is not an either-or scenario. Different investors work according to different strategies, asset allocation/diversity and on different timelines. Also, some investors have the technical knowledge to manage and improve a property, while others work with consultants or fund managers (when an investment is made with several sources of funding in collaboration) or through joint ventures. For more information on the type of land or property investment in the UK that might be right for you, contact a qualified personal financial consultant.