Depreciation, renewal funds and the consequences for the cost rent
February 24, 2022
How do depreciation and contributions to the renewal fund impact cost rent? Wüest Partner was asked to find answers to these questions as part of a client project.
The project, named “Depreciation and contributions to the renewal fund in the context of economic aging of existing properties”, is of great importance for real estate owners who rent out their properties at a cost, such as cooperatives, municipalities and cantons.
Depreciation and contributions to the renewal fund form part of annual expenses and therefore affect the cost rent. But how high should annual depreciation be, and how much should be contributed towards the renewal fund each year? Without precise guidelines in this area, owners have a certain amount of leeway, which often causes friction.
A cautious accounting practice – with high depreciation and payments into the renewal fund – results in correspondingly higher cost rents. Conversely, the funds necessary in the event of renovation may be inadequate.
It can be difficult for property owners to estimate how much to pay into renewal funds each year in order to ensure that sufficient funds are available for any necessary renovation measures. Decades of consultancy and valuation work have equipped Wüest Partner with a wealth of experience, as well as intelligent data to find solid answers to the questions outlined above. There are no clear right or wrong solutions in this area, so our task was to show the various possible approaches and their consequences for cost rent. The aim was therefore to identify, together with the client, what foundations are required to make the intelligent decisions in each specific case.
We calculated the depreciation and contributions to the renewal fund, as well as the resulting cost rents, schematically for three property types: new buildings, renovated properties and older buildings. The graph below shows two different depreciation variants for a new building and their effects on the cost rent. These calculations can also be run for specific properties or for an entire portfolio.