Ask Your Mates Open Forum

Useful Life of Residential rental properties

  • 1.  Useful Life of Residential rental properties

    Posted 06 January 2019 16:32
    Is there a  methodology used  (or methodologies) to determine the useful life of residential rental properties?
    is this a pure finance/tax formula?  Is condition assessed and included?
    Any advice on how 'useful life'  links in with valuation and depreciation?


  • 2.  RE: Useful Life of Residential rental properties

    Posted 06 January 2019 17:21
    I think first thing is to recognise that the valuation of residential properties (as with any other assets under AASB13) has no direct link to the assets or components useful life. In this case the valuation is based on a market valuation of the entire property. The value of the land is then deducted from the overall valuation to arrive at the value of the improvements.

    Under AASB116, for depreciation expense purposes, the asset then needs to be split into the different parts that have a useful life with each part depreciated separately. In accordance with the AASB Residual Value decision of May 2015 this requires splitting the asset into its components and then further splitting each into short-life and long-life parts.

    As a residential property you will need to give consideration of what you think the future asset management life-cycle will be for the property. For example - are you likely to hold it for 5 - 10 years and then sell it (in which case you need to think about Residual Value) or are you likely to keep it indefinitely (in which you case you need to think about the renewal treatments you are likely to undertake to keep the asset is good condition).


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    David Edgerton. FCPA
    Director APV Valuers and Asset Management
    Director Asset Valuer Pro
    David@assetvaluer.net. David@apv.net
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  • 3.  RE: Useful Life of Residential rental properties

    Posted 08 January 2019 18:13

    In light of various queries raised in relation to the life expectancy of Assets I submit an overview of matters to be considered when deciding on the total overall life expectancy of an asset and also the remaining life expectancy of a particular building or structural asset. These are important "Attributes' to be included in the overall deliberations of the Valuer in Asset Valuation process for Financial Reporting Purposes.

    Whilst some professions such as for instance Accounting Professionals, Surveyors, and Engineers engage in procedures using precise input of attributes into their work which results in a completed document which can be supported by way of precise support calculations and or formula in conjunction with reference to detailed guidelines and parameters set down in legislation and set documentation. These professions generally use standard calculations including additions, subtractions, division, and multiplication, etc, together with some formula and set tables such as annuities, sinking funds, and terminable interest calculations to obtain an outcome which should be absolutely accurate in totality. These professions are usually capable of processing an outcome which is therefore capable of being supported with respect to each and every data attribute inserted by way of a calculation or formula because that is how the process works. The data that these professions use is provided by way of actual provided data or by reference to published readily available recorded documentation.

    The Valuation Profession does not work in the same way as it is more subjective, and the Valuer does not have at his disposal all of the reference data and information set down and which is necessary to complete a valuation project and is therefore obliged to resource most of the support data and documentation himself/herself. Valuer are not considered qualified nor accepted to complete some valuation projects on their own until after they have gained five years intense practical experience. This is due to The Valuer having to gain the experience necessary and the knowledge gained is stored within the Valuer's own memory bank. This relates to many attributes to be decided on inclusive of Life Expectancy.

    Why is this the case???

    It is due to the near infinite number of variables that a Valuer must consider in deciding on each and every attribute to use within the valuation process. The decision to use a particular inserted attribute within the valuation process, and in this instance within the Excel Valuation Schedules is not based particularly on a calculation or formula but on the Valuer's judgement as to what that attribute should be relative to any and all researched documentation that the Valuer has compiled but also based on his considered judgement of what should apply. In other words, the Valuer should complete as much research as possible and use such support documentation but that the Valuer would also rely on his own judgement as a result of his experience. This means that there is not always a calculation, formula, or precise reference point available for each attribute inserted into the workbook as it is accepted practice for a Valuer to use his/her judgment at to what that input should be.

    This reserve of knowledge is used in conjunction with the technically recorded data stored on a HD or SSD digitally and the combination of all of this information is used to assist with providing judgements as to what each and every attribute should be.

    The adoption of a Valuer relying on his judgement as to valuation entries is not only accepted by the profession and its governing bodies, but most importantly by the Courts which have jurisdiction to hear matter relating to valuation evidence. These include jurisdictions relative to Property Law, Family Law, Compensation matters for compulsory acquisitions, rating and land tax valuations, and insurance matters.,

    The number of variables that are considered for each single attribute to be inserted in the workbook is enormous and each one is different.

    Some examples of this is say for the Total Life Expectancy of an Asset and also the remaining Life Expectancy of an Asset.

    Some of the items to be considered are listed below:-

    • Climatic conditions-humidity
    • Climatic conditions-intensity of hot and/or cold weather
    • Climatic conditions-humidity
    • Climatic conditions-history of cyclonic weather
    • Climatic conditions-direction of prevailing winds
    • Climatic conditions-intensity of prevailing winds
    • Weather patterns- whether prevailing winds carry salt air
    • Weather patterns- amount of annual rainfall
    • Weather patterns- number of wet days over year
    • Weather patterns- proximity to sea
    • Proximity to swamps
    • Intensity of utilisation
    • Historical maintenance programs
    • Current and future maintenance programs
    • Quality of original workmanship
    • Standard of materials used
    • Quality of material and workmanship used in maintenance and upgrades
    • Age of assets (for Remaining useful life)
    • Current condition rating of assets (for Remaining useful life)
    • Current and future maintenance programs (for Remaining useful life
    • Changing demographics (for Remaining useful life
    • Intensity of utilisation (for Remaining useful life)
    • Presence of Insect pests (for Remaining useful life)
    • Presence of animal pests (for Remaining useful life)
    • Changing lifestyles (for Remaining useful life)
    • Changing acceptable designs (for Remaining useful life)
    • Changing in acceptable configurations (for Remaining useful life)
    • Physical and social obsolescence

     

    This list only covers some of the considerations required to be contemplated for each and every asset whether it be a building or other structure, or an infrastructure asset, or a land asset, and only for the attributes for Life Expectancy.

    This is an example of some of the challenges encountered by a Valuer in providing each attribute entry into the workbook and why there may be no simple support calculation or formula provided or capable of being provided, that is because it is not time effectively practical nor possible to record on nor is it considered appropriate or necessary to provide one.

    Whilst the comments within the preceding paragraphs emphasise the difficulties that some personnel engaged in employment within Local Government would endure to also correctly decide on an assets Life Expectancy, such comments also may assist such personnel in refining their decisions with regard to these matters.

     

    "In relation to the assessment of the estimation of the remaining useful life of each building asset it is considered that the calculations should be made on the basis of the overall structure, with individual elemental depreciation figures being acceptable and included where considered appropriate. This is due to the nature of the structures whereby it is considered that the different identifiable construction elements making up the total structure would not depreciate at the same rate per annum or have the same overall total life expectancy.

    When considering the estimated remaining life of each of the assets consideration has been given to the construction; present age; condition; serviceability; climate conditions, and present and potential utilisation. Investigations have been made into the lifespan of the assets to better understand the factors influencing sustainable physical, functional, and economic asset life-expectancy. This should be combined with general information collated over a long period of working within each LGA.

    It may also be that some assets do not represent the optimum development potential relative to the present day expectations and for this reason they may have a shorter potential economically viable remaining life expectancy due to such factors. Whilst their physical life expectancy may be longer, this may not mean that their economic life span equates to this same period."

     

    Neil V Teves AAPI CPV

    Asset Advance ♦ Valuers

    Suite 11A Solander Centre,

    182 Grafton Street,

    Cairns City Qld 4870

    Email: assetadvance@bigpond.com




  • 4.  RE: Useful Life of Residential rental properties

    Posted 08 January 2019 18:14
    Hi Dianne,

    Utilising an asset's useful life to derive value is normally associated with the cost approach to a market valuation (Fair Value) which is often  only used in the absence of sales evidence to support the opinion of value. As residential properties are strongly represented in the market place, the comparable sales approach to valuation is the correct approach. You may also wish to consider AASB40 in addition to AASB116 and AASB13

    There is no formula for this. and yes, condition plays an important factor in the market (fair) value of the asset.

    Depreciation on all assets is an economic one and with active markets, depreciation is typically non-linear and the asset can even experience appreciation. For residential properties (like many other assets) the end of their economic life is dictated by the highest and best use of the underlying land asset. At some stage, the market will dictate the land asset can provide superior returns when redeveloped with the same land-use or utilised as an alternative land-use.

    Typically, residential buildings do not have residual values. If you purchase a residential property at $400,000 (land $250,000, improvements $150,000) and revalue it at $450,000 (land $350,000, improvements $100,000), you can then calculate the depreciation over the period.

    Componentisation (building up an asset value from multiple sub-asset values), whilst a useful property management tool is not a valuation approach and should be avoided for this purpose. Nor should you split market based values into multiple sub-asset values (i.e. floor, carpet, walls, etc), as it is not supported by markets and therefore incorrect.

    However, that does not assist you with what I suspect is a need to place a useful life on your residential rental properties for asset management purposes

    It really depends on the type, style and era of the dwellings and their location. City markets hold value in older ornate dwellings (i.e. federation era) whilst country markets prize modern houses. Dwellings constructed between the 1940's – 1970's tended to add a lower value to the land but as more recent modern developments lack design appeal and structural integrity, markets are beginning to place greater value on these austerity and post war dwelling styles.

    Other factors that influence useful life of the residential dwelling include whether it is detached or part of group of dwellings, zoning, land area, local real estate market and local business environment.

    To play it safe, if you are in the country you could adopt 80 years, in the city, say  60 years. Otherwise, you may seek to get the assets valued by a professional and qualified valuer and one who is a member of the Australia Property Institute or Royal Institution of Chartered Surveyors.

    Good luck


































































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    Martin Burns
    National Director - Valuation
    Liquid Pacific
    North Sydney NSW 2060
    www.liquidpacific.com
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  • 5.  RE: Useful Life of Residential rental properties

    Posted 08 January 2019 20:43
    This discussion highlights the extensive amount of complexity involved in asset valuation and the reasons why valuers need to firstly complete an appropriate tertiary qualification prior to passing professional exams and satisfying experience requirements prior to being able to call themselves a valuer. The valuation of residential properties would normally be undertaken using the market approach and because it involves the valuation of land as a separate asset it must be undertaken by a registered valuer. The Land Valuation (or similar) acts in the various jurisdictions mandate that land can only be valuers by a registered valuer with the appropriate qualifications and expertise. The commentary provided by Neil and Martin highlights the complexity of issues that valuers consider when valuing assets.

    However, for assets valued under the cost approach, as it does not involve land or a market approach, does not necessarily have to be done by an registered valuer. This is why some assets are valued by engineers or via in-house teams. What is critical is that the methodology and associated calculations comply with the requirements of the accounting standards and deliver outputs that not only satisfy the valuation requirements but also satisfy other accounting standard requirements. For example the value (AASB13) of an asset valued under market approach is normally provided at the whole-of-asset level. However, for depreciation expense requirements (AASB116 or other standard as appropriate) the asset needs to be dis-aggregated to a level than enables each part of the asset that has a different useful life to be depreciated separately. This requirement is covered in the AASB Residual Value decision and Interpretation 1030.

    In contrast the valuation under AASB13 using a cost approach would necessitate values derived at the sub-component level taking into account general obsolescence and the key characteristics as set out in paragraph 11 (condition, location and restrictions). Note that depreciation and useful life are not considered relevant for valuation under AASB13.

    The key to a successful valuation process is to ensure a collaborative process involving accounting, valuation and if necessary engineering expertise. This is necessary to ensure a broad based approach that covers and ensures full compliance with all output needs.




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    David Edgerton. FCPA
    Director APV Valuers and Asset Management
    Director Asset Valuer Pro
    David@assetvaluer.net. David@apv.net
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  • 6.  RE: Useful Life of Residential rental properties

    Posted 09 January 2019 16:07
    It usually comes as a surprise to accountants and others to discover the valuation profession has its own international standards and Australian equivalents. There are not multiple sets of valuation standards embedded in other professional standards but only one set of standards for valuation and for the valuation profession and that is the International Valuation Standards. (www.ivsc.org).

    Accounting standards are NOT valuation standards.

    It may also be surprising to know that a valuation is a legal document that can only be created by an accredited valuer and this is framed in legislation. Therefore, engineers, accountants and other consultants who provide valuations and are not accredited to do so (i.e. API or RICS); and it is not their core business, are likely to be breaking the law. Valuation service providers are subject to the laws of the land (I.e.. In Queensland and WA you need to be licensed by the Government and other States dictate requirements for practicing valuers).

    Statements that suggest non-accredited valuers are exempt from legislation if they use the cost approach to valuation is misleading. The cost approach to valuation is but one of three primary approaches to valuation. The other two are the direct comparison and income approaches and all three form the foundation of the qualified valuers professional armoury.

    Non-valuers fail to recognise the Cost Approach to valuation is actually a market based approach, where the opinion of value is formed in the absence of sales evidence.

    Valuation expertise is required to know when to use the correct approach to valuation. If all you know is the cost approach, then it is impossible to be a valuer. However, professional valuers tend to avoid using the cost approach where possible because it is unreliable and not well regarded in the commercial world. As an example, a bank would rarely, if ever accept a valuation based upon the cost approach.

    Furthermore, a firm providing valuations that is not a member of the AAPI or RICS is unlikely to have the correct Professional Indemnity (PI) Insurance in place. By using non-accredited firms, the client ends up accepting all the RISK associated with valuation error.

    The art of valuation is knowing the right framework in which to value an asset, adopting the correct approach to valuation, gathering the relevant supporting information, knowing where to find that information and then benchmarking the opinion of value against markets.

    Valuers call upon a number of resources to provide inputs to the valuation process, which may also include a range of professionals such as engineers, accountants, hydrologists, builders, real estate sales people and so on.

    These professionals are NOT valuers but experts in other fields that may be able to contribute to the valuers final opinion of an asset value.


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    Martin Burns
    National Director - Valuation
    Liquid Pacific
    North Sydney NSW 2060
    www.liquidpacific.com
    ------------------------------