Quality, Depreciation, and Property Performance

There are many ways in which quality can be defined for real estate. This paper demonstrates the uses of a classification of building quality (as opposed to locational quality) defined with particular reference to occupier utility. First, it is clear that age is related to this definition of quality. Buildings deteriorate and become obsolete as they age. However, some depreciate more quickly than others. The depreciation rate is a function of age but also of building quality or qualities. By measuring building depreciation and developing a classification of building qualities, it was possible to relate qualities to depreciation in order to prove that a stronger and more meaningful relationship exists between quality and depreciation than that which exists between age and depreciation. It is also clear the obsolescence factors, especially configuration and internal specification, are more important in this respect than deterioration factors. This was established by means of intensive questioning of real estate professionals and backed up by a survey of occupiers. The survey of occupiers was particularly important in three respects. First, it gave support to the selection of building qualities that appear to have been correctly determined by professionals and to have reflected the views of the occupier market. Second, the ranking of qualities as predictors of depreciation was confirmed: deterioration is least important and internal specification and configuration are most important. External appearance was disappointingly unimportant for London office occupiers. Hence a hierarchical approach confirmed the statistical approach. Thirdly, a further analysis of the four qualities shows clear results, especially the predominance of layout over floor to ceiling height in the configuration factor and the importance of services in internal specification. It appears that there is a relationship between quality and return. Further work (see Baum, 1989) suggests that pricing does not efficiently reflect these factors. Occupiers' preferences can probably be built into design without necessarily impacting on cost to an equal or opposite degree; investment returns will then be delivered, inter alia, by the resistance of rental values to depreciation.