Obsolescence, the relative measure of a building’s utility, starkly represents reducing capital value, shrinking rental income and future expense.
The £170bn UK office sector is known to suffer higher obsolescence than other asset classes, and requires higher levels of capital expenditure as a result. Yet 40% of offices have benefitted from minimal capital expenditure in the past 15 years, and an estimated 24% of office units currently lie vacant. With the average lease length now just six years, income streams from longer-term leases are more difficult to achieve, and predicting asset valuations solely upon long-term income streams may therefore be a dubious strategy.
The drivers of obsolescence
Awareness of obsolescence can be a force for good in maintaining building utility, enhancing capital values and turning around the fortunes of an ageing property portfolio. Beyond physical deterioration, which may be countered by rigorous planned maintenance, refurbishment or capital works, other forms of obsolescence to watch for are:
a) occupier expectations diverging from the property’s functional stability and fitness-for-purpose
b) new legislation causing compliance issues and impinging upon the building’s utility
c) the market’s perception of the building type and location changing over time
Forward thinking is required
With occupiers increasingly sensitive to build quality, location, flexibility, environmental credentials and new legislation, planning for the effect of creeping obsolescence becomes a prerequisite to extending the life of the property and meeting occupier expectations. Obsolescence planning acts as an early warning system and as a force for good, enabling properties to be future-proofed. In so doing, useful life and attractiveness is extended, income security from rentals underpinned and the effect of capital depreciation limited. That surely is a force for good.
In response to a brief from the BCO, LSH and IPD have undertaken an in-depth study into the issue of office obsolescence. For more information, visit the BCO website.
This article is part of our autumn 2012 edition of Asset Class.