This post is in reaction to an article asking if it is true real estate never depreciates. Below is the article and the reaction to it.
The past two phases of my Civil Engineering career has found me working with two of Nigeria’s top Real Estate companies.
I have planned, designed and also supervised projects. By virtue of working with the big boys of Real Estate in Nigeria, I have met and interacted with a lot of Real Estate agents and other upcoming Real Estate companies in Nigeria.
An Ongoing Real Estate Development
It is a common saying here, that Real Estate never depreciates, and I used to believe it was true, until the question was asked by one of my twitter followers, and I had to do a lot of critical analysis before answering his question.
Real Estate remains a very reliable investment, but like all other investments, there is a risk of depreciation associated with Real Estate.
Considering the first component of Real Estate: buildings, In Civil Engineering, all buildings have a design life. They are designed to last a certain number of years, usually between thirty and fifty years, depending on the budget of the owner. Consequently, as every cubic meter of concrete is poured, as every Kilogram of reinforcement is placed, the design life starts counting. Over a few months, several components starts losing value, some begin to call for repair, depreciation sets in.
If you purchase a piece of land and you have been asked to expect a certain Return on Investment, could anything possibly go wrong and reduce your ROI? Yes, a lot could go wrong!
Flooding could be an issue, as it takes a little increase in the level of adjoining land areas or an increase in the road level to get your land flooded. A bad drainage in the neighbourhood or the rechanneling of a river or some unfavourable incident at a nearby dam could get your property flooded. If you were to sell that property, no one will be willing to pay good money for it, and will definitely bargain lesser for the land. No one will even want to buy a flooded piece of land in the first, except there are no other available options.
Bad roads could also cause the value of a piece of land to depreciate. If the road(s) leading to your piece of land becomes bad, investors and prospective home owners will be discouraged and the demand for land in that neighbourhood will reduce. It is basic Economics that whenever there is low demand for any commodity, the price drops in an attempt to encourage demand.
Security could also be a major factor. If any expensive neighbourhood becomes notorious, either because of armed robbery, kidnapping, bombing or any other crime, the value of that neighbourhood will drop, and your piece of land will definitely lose its value.
Natural disasters or environmental disasters could also deal a fatal blow on your piece of land. Oil spillage, erosion, collapsed bridges, collapsed power supply structures can all lead to a fall in the value of your piece of land.
When next you intend to purchase a property, please consider the above factors, and if you are spending a lot on the piece of land, I will strongly advise that a Soil investigation and topographical investigation be carried out. It is better to be safe than to be sorry.
Zikist Movement Comment
Yes. Real Estate (undeveloped land) depreciates, but often it is only for a temporary period and at a very limited rate. This is unlike houses (properties) and cars that can depreciate permanently if not repaired on time.
Secondly, external factors can cause the value of your real estate to appreciate even without your intervention. This is unlike a property or car in which you must shell out the money for the repairs.