Condominium unit valuation based on land value, construction costs, etc.

[lkn]

20 minutes ago, hyperdimension said:

You would only "own" the condominium for some time, after which the physical unit will eventually be lost and worth 0 when occupants are forced to vacate

 

Forced by whom?

 

If the owners neglect to maintain the building, I assume you could end up in a situation where the government steps in and simply declare the structure unsafe for living and thus revoke the permission, in effect making the condo worth only the underlying land or the cost of making the building safe.

 

But isn’t that rather pessimistic?

 

If the concrete columns and slabs of the building are done properly, they should last much much longer than 50 years, look at the Coliseum, it was built almost 2,000 years ago, and everything apart from the columns and slabs are easy to repair, should it become damaged, although for a high-rise, it’ll be more challenging, but we are talking about 50+ years into the future, who knows what sort of technology we will have at that time.

 

Edited January 10, 2017 by lkn
Typo

[trogers]

43 minutes ago, lkn said:

 

Forced by whom?

 

If the owners neglect to maintain the building, I assume you could end up in a situation where the government steps in and simply declare the structure unsafe for living and thus revoke the permission, in effect making the condo worth only the underlying land or the cost of making the building safe.

 

But isn’t that rather pessimistic?

 

If the concrete columns and slabs of the building are done properly, they should last much much longer than 50 years, look at the Coliseum, it was built almost 2,000 years ago, and everything apart from the columns and slabs are easy to repair, should it become damaged, although for a high-rise, it’ll be more challenging, but we are talking about 50+ years into the future, who knows what sort of technology we will have at that time.

 

 

Force by this term - Beyond Economic Repair...

 

We can restore even ancient monuments... but, would that be economical at that point in time?

[hyperdimension]

1 hour ago, lkn said:

Forced by whom?

 

If the owners neglect to maintain the building, I assume you could end up in a situation where the government steps in and simply declare the structure unsafe for living and thus revoke the permission, in effect making the condo worth only the underlying land or the cost of making the building safe.

 

But isn’t that rather pessimistic?

 

Forced by authorities.

 

It's not pessimistic, but realistic in the long term. We're not talking about gold, diamonds or permanent land here, which can be passed down perpetually through countless generations. See the Thai Appraisal Foundation's table that I had shown in the original post of this thread. They assume a maximum 50 years of age for a condominium building (corresponding to 2% simple depreciation per year). I don't think they have a financial interest in limiting ages of all buildings. If you choose well maybe you could find one that will end up lasting much longer than 50.

 

I understand that not everyone is interested in thinking so far ahead, as there may be more than enough to think about now and in the immediate future. Many may simply let heirs deal with whatever may happen so far into the future.

 

[trogers]

While the West is struggling over the rights of the collective over the rights of the individual, Singapore and Hong Kong has progressed beyond to move their cities forward: 

 

Collective (or Enbloc Sales) of condominium or strata titles.

 

https://www.google.co.th/url?sa=t&source=web&rct=j&url=https://www.99.co/blog/singapore/en-bloc-sales-how-does-it-work/&ved=0ahUKEwiJ9u7lt7fRAhWHO48KHVnJDMUQFgguMAI&usg=AFQjCNFulLFaHA6nk7Ke7cGXIIbqMVkPEg&sig2=s_mrTni1JKXDcOFWVhe7WQ

[lkn]

21 minutes ago, hyperdimension said:

They assume a maximum 50 years of age for a condominium building (corresponding to 2% simple depreciation per year)

 

They actually state that it depreciates until it reaches 40% and then no further depreciation beyond that point, even if it’s older than 30 years.

 

I don’t know the context of your table, so unsure from where they get the 50 years, but there are plenty of multi-storey concrete buildings older than 50 years, so I would take it with a grain of salt.

 

[hyperdimension]

1 hour ago, lkn said:

They actually state that it depreciates until it reaches 40% and then no further depreciation beyond that point, even if it’s older than 30 years.

 

I find that strange, especially if it means that even at end-of-life a unit will still retain 40% of its original value.

 

With anything else that is manufactured or constructed, once it becomes unusable, it loses all of its value, and you throw it away. Maybe in the case of a car that no longer works, you could try to sell it for spare parts, but the amount of money you would get from the sale would still be tiny compared to the original price of the car, nowhere near 40%.

 

It makes more logical sense to assume that once a unit eventually becomes unlivable, whether it be 50 or 100 years from inception, the physical unit would no longer hold any value. Hopefully by then the share of land would be worth a significant amount. Of course, if the owner could additionally receive compensation equal to 40% of the unit's value at its inception, then that would be amazing, but what would be the rationale?

 

[lkn]

5 minutes ago, hyperdimension said:

I find that strange, especially if it means that even at end-of-life a unit will still retain 40% of its original value.

 

With anything else that is manufactured or constructed, once it becomes unusable, it loses all of its value, and you throw it away […]

 

Again with this “unlivable” and “end-of-life”. Look at the NYC skyline, many of these buildings are 80-90 years old. Are they at the end of their life and unlivable? Is anyone coming to throw people out of these buildings and demand they demolish them and sell the land?

 

I am not claiming that everything built today is built to last a thousand years, but I also don’t buy that a new condo today is useless in 50 years, we have plenty of examples from the last centuries of buildings having much longer lifespan. But of course the state of the building in fifty years will depend on how well it was constructed and how much maintenance has been done over the fifty years.

 

[wordchild]

I used to own a flat in London that was in a building close to 200 years old. Built by one of the speculative builders of that day. It's still standing and (annoyingly) has gone up in value significantly since I sold it , a decade or so ago!

[hyperdimension]

20 minutes ago, lkn said:

Look at the NYC skyline, many of these buildings are 80-90 years old. Are they at the end of their life and unlivable? Is anyone coming to throw people out of these buildings and demand they demolish them and sell the land?

 

I am not claiming that everything built today is built to last a thousand years, but I also don’t buy that a new condo today is useless in 50 years

 

Would you say that construction quality in Thailand is at the same level as in U.S.A.?

 

How long (either a single value or range) would you say buildings that are constructed today in Thailand would last on average?

 

Is your main argument that condominium buildings may last 100 years or more, so there's no need to think about loss of value of a unit any time soon? That would be valid if you don't intend to have it passed down through future generations (like other forms of real estate).

 

[hyperdimension]

16 minutes ago, wordchild said:

I used to own a flat in London that was in a building close to 200 years old. Built by one of the speculative builders of that day. It's still standing and (annoyingly) has gone up in value significantly since I sold it , a decade or so ago!

 

Is the rise in value of the flat now driven largely by rise in land value?

 

Or has the building gained a kind of heritage status?

 

[trogers]

1 hour ago, lkn said:

 

Again with this “unlivable” and “end-of-life”. Look at the NYC skyline, many of these buildings are 80-90 years old. Are they at the end of their life and unlivable? Is anyone coming to throw people out of these buildings and demand they demolish them and sell the land?

 

I am not claiming that everything built today is built to last a thousand years, but I also don’t buy that a new condo today is useless in 50 years, we have plenty of examples from the last centuries of buildings having much longer lifespan. But of course the state of the building in fifty years will depend on how well it was constructed and how much maintenance has been done over the fifty years.

 

 

Whether the building is only 5 years or a hundred years, the economic consideration that leads to collective sales in Singapore, Hong Kong, or other subsequent city, is not liveable or end-of-life of the building, but the change in the value of land due to changes in zoning laws.

 

Say you have a building of 8 floors today. And a year later, the land it sits on is permitted to raise a 45-floor building, will the collective owners wait for the building to be unliveable before selling?

[lkn]

1 hour ago, hyperdimension said:

Would you say that construction quality in Thailand is at the same level as in U.S.A.?

 

How long (either a single value or range) would you say buildings that are constructed today in Thailand would last on average?

 

Is your main argument that condominium buildings may last 100 years or more, so there's no need to think about loss of value of a unit any time soon? That would be valid if you don't intend to have it passed down through future generations (like other forms of real estate).

 

You would have to compare current construction quality with construction quality 80 years ago in the U.S. to get an idea about whether the current buildings will hold up as long as the buildings in e.g. N.Y.C. has done.

 

However, a large part is really about maintenance, rather than initial construction, which is why it is close to impossible for me to speculate about how long the current buildings will last. Some may look like crap in 20 years, some may still be nice to live in, even in 100 years.

 

You do the concrete structure, where you must ensure that the rebars are properly sealed and that the concrete is of good quality (saving on cement seems to have been an issue some places in China).

 

After that, you want to protect this structure against corrosion, so you do a roof that leads water away from your structure, and you do a facade to protect it against wind and weather.

 

The latter elements will not last forever, but they can be repaired, that’s (sort of) the point of them.

 

A condo I sold less than a year ago (Europe) was from 1972 and made out of concrete. We had an engineering company go over everything to do a 10 year maintenance plan, and nothing about the load bearing structure was pointed out, but we did need to replace the roof.

 

 

If I compare that condo with what I have in Chiang Mai, then no doubt that the one from 1972 was of lower quality, however, it was made from prefabricated concrete elements, which I think is generally better than the columns they do on the site, because you can better control the process in a factory than on the building site, but that is just my thinking, and not everything in Europe is built from prefabricated elements.

 

Btw: the condo from 1972 (which I bought in 1996) had an annual appreciation of ~11% through the 20 years I owned it, even though your estimates would have it unlivable in 5 years

 

As for my main argument being that there is no need to think about loss of value of a unit any time soon, that is probably a good summary of my view.

 

[hyperdimension]

11 hours ago, lkn said:

However, a large part is really about maintenance, rather than initial construction, which is why it is close to impossible for me to speculate about how long the current buildings will last. Some may look like crap in 20 years, some may still be nice to live in, even in 100 years.

 

Maybe the 50 year value that the Thai Appraisal Foundation uses is for the very first condominium buildings. The purpose for the numbers in their table is for further calculation (e.g. accounting or forecasting), so a number needs to be provided for the lifetime of a building, and they chose 50. Maybe this number will gradually increase in future in acknowledgement to improving construction quality in Thailand.

 

 

11 hours ago, lkn said:

Btw: the condo from 1972 (which I bought in 1996) had an annual appreciation of ~11% through the 20 years I owned it, even though your estimates would have it unlivable in 5 years

 

There will of course always be disparity between valuation model outputs and real market prices (just like in quantitative finance for financial markets), as valuation models can never exactly explain what happens in the real world (but we can still continue to try by continually improving the models). There will always be elements of unpredictability in real markets, because real market players are people, and people behave in ways that aren't always 100% predictable, and may make decisions based more on emotions than logic or calculation. You can see real estate developers' attempts to exploit people's emotion-based decision-making in the kind of marketing that they create and display.

 

So in addition to land share appreciation and physical unit depreciation, there would be a market premium component to a unit's value that would be based on demand in the real market. There would actually be different kinds of demand, such as:

• Demand to be in the building;
• Demand to live in the particular unit;
• Demand to be in the area.

I have the first two separate because a building could be old and undesirable but a nicely renovated unit in it could still be attractive to the market. For new buildings, it could be the same.

 

There will always be physical unit depreciation, as a unit will naturally continue to deteriorate as it ages (though maintenance can counteract deterioration and slow down the aging). But market demand like those just listed can offset such depreciation and result in net appreciation. As a building and a unit in it becomes old, and new supply of units nearby increases, the first 2 demands may decrease and eventually be lost, with demand to be in the area remaining. The land share value of a unit may have also exceeded physical unit value, so these could then become the drivers of real market value appreciation.

 

Edited January 11, 2017 by hyperdimension

[hyperdimension]

It should also be noted that the value of a land plot does not appreciate just because it exists; it appreciates due to demand for it (e.g. desire to build something on it in that area). So an assumption of 5% annual land value appreciation is based on the assumption that demand for that land will remain. Maybe in reality such demand won't be so consistent, but that's just part of the risk of real estate investing.

 

[trogers]

27 minutes ago, hyperdimension said:

 

Maybe the 50 year value that the Thai Appraisal Foundation uses is for the very first condominium buildings. The purpose for the numbers in their table is for further calculation (e.g. accounting or forecasting), so a number needs to be provided for the lifetime of a building, and they chose 50. Maybe this number will gradually increase in future in acknowledgement to improving construction quality in Thailand.

 

 

 

There will of course always be disparity between valuation model outputs and real market prices (just like in quantitative finance for financial markets), as valuation models can never exactly explain what happens in the real world (but we can still continue to try by continually improving the models). There will always be elements of unpredictability in real markets, because real market players are people, and people behave in ways that aren't always 100% predictable, and may make decisions based more on emotions than logic or calculation. You can see real estate developers' attempts to exploit people's emotion-based decision-making in the kind of marketing that they create and display.

 

So in addition to land share appreciation and physical unit depreciation, there would be a market premium component to a unit's value that would be based on demand in the real market. There would actually be different kinds of demand, such as:

• Demand to be in the building;
• Demand to live in the particular unit;
• Demand to be in the area.

I have the first two separate because a building could be old and undesirable but a nicely renovated unit in it could still be attractive to the market. For new buildings, it could be the same.

 

There will always be physical unit depreciation, as a unit will naturally continue to deteriorate as it ages (though maintenance can counteract deterioration and slow down the aging). But market demand like those just listed can offset such depreciation and result in net appreciation. As a building and a unit in it becomes old, and new supply of units nearby increases, the first 2 demands may decrease and eventually be lost, with demand to be in the area remaining. The land share value of a unit may have also exceeded physical unit value, so these could then become the drivers of real market value appreciation.

 

 

Demand to be in the area is very real.

 

When I first studied the street I wanted to invest in, there was only new and old, and a wide gap of asking rents between them.

 

I bought old, refurbished it, and offer rents at middle ground. Response from long term foreign tenants is excellent.