In order to answer the question of the ideal age of a real estate investment, PriceHubble first examined the development of market prices and rents for buildings of different ages for its analysis. “Buildings, like cars, tend to depreciate faster in the early part of their life cycle than in later years. However, since a property usually also includes a plot of land that does not wear out, the value of the property then approaches the value of the land,” says Dr. Nima Mehrafshan, Head of Research at PriceHubble.
The analysis was carried out based on the PriceHubble valuation model. For each of these, a location in a major Swiss city was selected and a typical apartment in this location was evaluated. The year of construction was varied for each apartment assessed, while all other influencing factors were kept constant – including the time of the assessment. “In this way, we can determine how the market value and market rent of a typical apartment decrease with age, ignoring market-wide price changes over time,” adds Dr. Mehrafshan.
Biggest loss in value in Bern and sharpest drop in rent in Basel – real estate in Geneva with the smallest loss in value
The majority of the price loss occurs across all the cities examined in the first 40 years after construction and then levels off between 17 and almost 26 percent. Real estate in the city of Bern experienced the greatest loss in value at around 26 percent. In contrast, real estate in Geneva only lost around 17 percentage points.
A similar picture emerges when it comes to rents, with the decline in market rents already having largely taken place after 20 to 30 years. After this time, rents are between -12 and -25 percent compared to a new building. Rents in the city of Basel are falling the most at around 25 percent, while rents in Geneva are only falling by just under 12 percent.
Lowest rental yield after 10 to 20 years
Basically, rental yields are only slightly influenced by the age of the building. The rental yields for new buildings are only slightly lower than for older buildings. The rents fall slightly in the first few years, since the market rents fall a little faster than the market prices with the age of the building. In general, rental yields are lowest for buildings that are 10 to 20 years old and range between 2.3 percent and just under 3.0 percent. After almost 60 years, returns reach their zenith and remain between 2.6 percent and 3.4 percent.
The city of Bern is the leader in terms of rental returns with a rental return of around 3.4 percentage points after 60 years. The city of Zurich has the lowest average rents and shows a return of 2.6 percent after 60 years.
10-year return: Bern is the leader
A similar picture emerges when looking at 10-year returns (combination of rental returns and market value loss through wear and tear). Here, too, the yields level off from an age of just under 60 years. The city of Bern is also the front runner with a total return of around 33 percent. Real estate in the city of Zurich meanwhile has the lowest average return of around 26 percent.
In principle, the return on buildings under 20 years of age also falls to 16 percent to 23 percent over a 10-year period. «In order to answer the question of the best building age for an investment, investors must also consider the maintenance costs in addition to our analysis. Here, of course, the faster depreciation early in the property’s life is offset by the higher maintenance costs for most older buildings. Nevertheless, investors can use the results of the study to review their investment strategy,” says Dr. Mehrafshan.
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