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Depreciation of Real Estate in Chennai

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Depreciation of Real Estate in Chennai

Last updated: July 17 2013
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  • Depreciation of Real Estate in Chennai

    Depreciation In Real Estate - Is mostly an accounting & Tax term in countries like Canada, US, Australia etc.

    In fact many tax systems prescribe longer depreciable lives for buildings and improvement.

    Depreciation has always been a part and parcel of all RE assets (with building or fixtures on land) we do NOT see it, as the appreciation in the land component usually over shadows the depreciation of building and fixtures.

    Now it is time we gave importance to depreciation component of RE.

    Why?

    Nowadays we are seeing properties sold at high price based on their "Design, Fittings, Fixtures, Marbles, floorings etc"

    Those are highly depreciating components.

    Buyers are "Over Capitalising" on a far far away location purely based on builder and the fixture and fittings in the property.

    The Style/design of construction that is expensive and popular today can be common and cheap in 2-5 years.

    When I was a boy Mosaic was cheap and common, Tiles were trendy, Granite was super posh.

    In about 5 years later, Granite was everywhere, Rajasthan marble was cheap and Italian marble posh was rare.

    These days float board is cheap crap and it is solid timber flooring etc,etc.

    When people are "over capitalising" and ignoring the fundamental of Real Estate "LOCATION,LOCATION and LOCATION".

    Today's premium, posh & rare flat (that one paid 2 times more than the prevailing price of the location) could be tomorrow's old fashioned flat in the middle of nowhere.

    There could be other new developments in the same area that offer better fixture at a cheaper price.

    I am not complaining about buying in far far location (provide one pays prevailing market rate for that location) I am only warning about "over capitalising" in those locations just for expensive building fitting and fixtures.

    I think - It is about time we talk about depreciation in real estate.
    Last edited June 23 2013, 09:02 AM.
  • #2

    #2

    Re : Depreciation of Real Estate in Chennai

    Ideally luxury apartments which were sold for enormous premium compared to normal apartment nearby must depreciate over time.

    In reality the premium commanded by new luxury apartments keep increasing thereby pulling up the resale value of old luxury apartments as well.

    Callex Euphoria was launched like any other normal apartment, but due to quality of construction, delivery and gentry it has turned into a premium residential community. It commands atleast 75% premium over similar apartment nearby. This is in a oversupply area like Sholinganallur. IMO, this premium will only widen as time goes by until it faces competition from similar apartment complex.

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    • #3

      #3

      Re : Depreciation of Real Estate in Chennai

      Finallyyyy a good post that makes sense to debate


      Originally posted by Economist View Post
      Depreciation In Real Estate - Is mostly an accounting & Tax term in countries like Canada, US, Australia etc.

      In fact many tax systems prescribe longer depreciable lives for buildings and improvement.

      Depreciation has always been a part and parcel of all RE assets (with building or fixtures on land) we do NOT see it, as the appreciation in the land component usually over shadows the depreciation of building and fixtures.

      Now it is time we gave importance to depreciation component of RE.

      Why?

      Nowadays we are seeing properties sold at high price based on their "Design, Fittings, Fixtures, Marbles, floorings etc"

      Those are highly depreciating components.

      Buyers are "Over Capitalising" on a far far away location purely based on builder and the fixture and fittings in the property.

      The Style/design of construction that is expensive and popular today can be common and cheap in 2-5 years.

      When I was a boy Mosaic was cheap and common, Tiles were trendy, Granite was super posh.

      In about 5 years later, Granite was everywhere, Rajasthan marble was cheap and Italian marble posh was rare.

      These days float board is cheap crap and it is solid timber flooring etc,etc.

      When people are "over capitalising" and ignoring the fundamental of Real Estate "LOCATION,LOCATION and LOCATION".

      Today's premium, posh & rare flat (that one paid 2 times more than the prevailing price of the location) could be tomorrow's old fashioned flat in the middle of nowhere.

      There could be other new developments in the same area that offer better fixture at a cheaper price.

      I am not complaining about buying in far far location (provide one pays prevailing market rate for that location) I am only warning about "over capitalising" in those locations just for expensive building fitting and fixtures.

      I think - It is about time we talk about depreciation in real estate.

      Comment

      • #4

        #4

        Re : Depreciation of Real Estate in Chennai

        Originally posted by Love4land View Post
        Ideally luxury apartments which were sold for enormous premium compared to normal apartment nearby must depreciate over time.

        In reality the premium commanded by new luxury apartments keep increasing thereby pulling up the resale value of old luxury apartments as well.

        Callex Euphoria was launched like any other normal apartment, but due to quality of construction, delivery and gentry it has turned into a premium residential community. It commands atleast 75% premium over similar apartment nearby. This is in a oversupply area like Sholinganallur. IMO, this premium will only widen as time goes by until it faces competition from similar apartment complex.
        The initial buyers of Callex made money as there was no supply OMR to cater the needs of enormous supply of offices.

        They are one of handful of flat in the middle of OMR. No villas, nothing.

        Now there is plenty of decent supply of flats and villas.

        I strongly believe that the subsequent buyer who overcapitalised (by 75% premium) will loose growth badly.

        The Initial buyer did not "overcapitalise" he paid bare market price, The subsequent looser who paid 75% premium will be victim.

        Rarely you do get such looser shopping around in a bull market.

        We cannot use such outliers to define investment strategies

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        • #5

          #5

          Re : Depreciation of Real Estate in Chennai

          Will you say that someone who is purchasing a unit in Hiranandani Oceanic for 7500 psf a loser?

          Comment

          • #6

            #6

            Re : Depreciation of Real Estate in Chennai

            L4L

            question is spot on.

            my specific point is since they offer low uds compared to other builders, over time they will be the biggest loosers since the uds is bare minimum versus lets say opaline who may offer 25% uds.....uds being based of land value meaning lets say price of hira land, opaline, archean albatross etc should be same value for land since they based in same area ? correct me if i am wrong

            Originally posted by Love4land View Post
            Will you say that someone who is purchasing a unit in Hiranandani Oceanic for 7500 psf a loser?

            Comment

            • #7

              #7

              Re : Depreciation of Real Estate in Chennai

              I'll answer it after Eco responds to my question.

              Comment

              • #8

                #8

                Re : Depreciation of Real Estate in Chennai

                Initial buyer makes money the later buyer buying at 75% more pricing is losing money in a bull market IMO is a prediction game that can go eitherways. What if the pricing of Euphoria appreciates 100% from where we are today ( i agree the odds are low , but if it did) then the later entrant really does not matter.
                Lets take anotherexample i saw Prestige BV ad today again in hindu first page when i visited them in Nov/Dec 2012 they were priced at 5400psft , which was 1000rs more than launch price, if i had entered then would that be a bad decision compared to the 6000+ price they are planning to finish the final units.
                If you think about it, 5400 with a 15 month delivery and favorable payment plan vs 4400 or 4800 with 36 months delivery with risk can be argued as one is better than other.

                the primary viewpoint on overcapitilisation is around what you want to pay in an area over and above the prevailing market price and what features command that premium
                For ex Take PALM MEADOWS in Bangalore
                adarsh palm meadows - Bangalore
                this was way over capitilized when it was launched 40L to 75L for a villa in 2002-2003 period in an area with poor roads, access etc,
                But gentry was commanding, features, layout, style were all superior,
                Today prices there are anywhere between 4 to 12C, Most CXOs live there, its hard to get a property there.
                so if you can spot a Palm meadows even 10km away from a prime location it can grow in value provided it is executed and delivered like PM

                Comment

                • #9

                  #9

                  Re : Depreciation of Real Estate in Chennai

                  Originally posted by Love4land View Post
                  I'll answer it after Eco responds to my question.
                  L4L i disagree, if Hira becomes an iconic property in OMR with ocean view water view whatever you want to call it, it can command a premium value no matter what the UDS is as a wholisitic unit.
                  If it really falls under the Palm meadows category like i just wrote about it can ( My review is it wont because of a whole list of preferntial issues i found when i saw the property)
                  If gentry is commanding in Oceanic and properties become hard to find in resale market and having an address in Hira on OMR becomes a prestige issue then it would carry a significant premium.
                  If for some reason Archean falters or cannot deliver their promises , then the value of Hira will even go up.
                  It really boils down to who can delivery a quality water view posh housing on OMR competing with what Hira has today

                  Comment

                  • #10

                    #10

                    Re : Depreciation of Real Estate in Chennai

                    Questions

                    @Eco, this is really a good discussion topic.

                    In our town (600 KM from Chennai in south direction), for a normally built house (there are hardly any apartments in our town) after 30-35 years the price assigned will be 0, irrespective of the condition. If the building is exceptionally built with all teak wood doors and windows, there will be decent value. For old Kallu kattidams with uthiram and pillars in teak, some people pay premium but these buildings are so rare.

                    Like you said not only apartments but any buildings tend to depreciate. The only thing that can drive up the price of a building is the inflation. Are there any valid reasons to believe that a building's value (excluding the land) go up except for inflation?

                    The other question I have is,
                    Having too many amenities invites maintenance as well as running cost and this cost will only grow big in time right?
                    Are people who choose apartment as a life style option really enjoying these amenities to the fullest? The reason for this question is except for gym, in our GC, I rarely see more than 5 people and I'm outside India

                    @K11 - Kallu Kattidam means Stone Building
                    Uthiram - Not sure what it is in English, someone translate please

                    Comment

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