Time takes its toll on everything – even residential buildings lose value over time. The general rule for the various components, installations and devices is that their value decreases by one to two percent each year. In addition, buildings undergo a reduction in value as the use of living space and the requirements for floor plans and equipment change. For this reason, an older house from the 1970s or 1980s will fetch a higher price when resold if it is well maintained and renovated in a contemporary style. This could include a new eat-in kitchen, well-kept bathrooms and spacious other rooms, for example. However, potential buyers will be deterred if their very first external impression of the facade and its surroundings suggests neglect.
Average service life
Building components, technical equipment and materials have a statistical service life. After expiry of this period, they must either be renovated or replaced. In principle, it is advisable for you as a homeowner to use the service life table as a guide:
- New floors and paintwork are needed every 10 to 15 years, for instance – carpets or emulsion paints are often due sooner.
- Kitchens, heating systems, wooden windows and sanitary facilities should be replaced after 15 to 20 years at the latest.
The Swiss Homeowner Association and Tenants’ Association provide a jointly developed service life table.
Conservation of value, but no investment
“Although the necessary maintenance and ongoing servicing preserve property value, they do not represent an investment in that sense,” emphasizes Matthias Holzhey, economist at UBS and Head of CIO Swiss Real Estate. Owner-occupied property and the associated running costs should clearly be counted as consumption expenses. Homeowners should not be under the illusion that renovations according to personal taste – for example the installation of high-quality kitchen furniture and appliances – are an investment. Expenditure on a conservatory, a sauna, embellishments to the garden or even a swimming pool does not usually increase the market value of the property one to one. This is because each owner has different preferences. While some people see their own pool in the garden as real added value, others have no use for it at all.
Specific examples with evaluation tools
Similar findings are obtained on the basis of hedonic valuation models commonly used in the market and the industry. Let’s take the owner of an older single-family house as an example: he has the choice between investing 100,000 francs in comprehensive renovation work or 60,000 francs in the conversion of the attic. The “returns” will be different: extensive renovation will generally only partially increase market value, since a substantial proportion of the amount forms part of standard maintenance and repair. If on the other hand the owner obtains more living space by adding a story or by converting the attic or basement, these investments are likely to pay off – in most cases, more usable living space means a higher willingness to pay on the part of prospective buyers.
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Consult price trends, taxes or the population development of 2,000 Swiss municipalities. In addition, a market price valuation answers questions about the purchase price, location quality, accessibility, etc. Ask your client advisor about this. He’s looking forward to your call.
Energetic improvements pay off
As Matthias Holzhey explains, energy-saving renovations and heating system conversions are also among the expenses that usually pay off financially. For example, if you install a modern heat pump that uses renewable energy, you will improve the property in several ways at once: firstly, you will be sure that your building and the services installed in it comply with the latest legislation. Secondly, this conversion will reduce the property’s energy and operating costs in the long term. Matthias Holzhey raises another point: “The tax deductibility of investments of this kind, and the subsidies from cantonal promotion programs, further enhance the attractiveness of such projects.” For example, anyone who invests 50,000 or 60,000 Swiss francs in this type of energy improvement will be able to refinance at least 20 to 30 percent of it through tax benefits and government investment contributions.
What role does the land value play?
Finally, price development also depends to a large extent on the location and on local land prices. Building land will increase in value in a positive economic environment – and, as a tangible asset, promises you protection against inflation. Owners of properties in substantial grounds will benefit disproportionately, whereas the amount of land is lower in percentage terms for condominiums. Land price trends evolve differently depending on the location and region. In the last 10 to 20 years, growth has been seen in large urban centers and agglomerations in particular. Whether or not real estate is a sound material asset and capital investment also greatly depends on the individual location: important factors include proximity to a medium or large town center, the number of jobs available, good transport connections and tax levels, as well as the financial standing and infrastructures of the municipality where the property is located.
Consider taxes when renovating
Anyone refurbishing or renovating a property should bear in mind the tax implications. In principle, value-maintaining investments can be deducted from tax, but value-enhancing investments cannot. You should nevertheless keep receipts for value-enhancing expenses, as they are important for determining real estate capital gains tax in the event of a sale.
To continue our case study of a single-family house: most of the costs of the complete renovation can be deducted from taxes, but the attic extension cannot. If you decide to carry out a major renovation or conversion project, you should ensure that the work extends over at least two different fiscal years. Staggering the work allows the costs to be shared accordingly, breaking tax progression as a result.
Value maintenance and value enhancement
Value-maintaining investments mainly include recurring measures for the maintenance and repair of the building and its surroundings. The replacement of existing elements with equivalent equipment (e.g. heating) also serves to maintain value.
Examples of value-enhancing investments are the purchase of additional or more expensive equipment in the kitchen, bathroom or basement. Typically, most conversions or outbuildings are also considered to be value-enhancing investments, for example the conversion of the attic, the installation of a sauna or the addition of a conservatory.