This is very common. The physical depreciation occurs due to usage of the asset. It is the normal wear and tear of the asset. All similar objects do not observe similar depreciation. Quantum of this depreciation depends on several factors.
- Manner of usage
- Environmental aspect
- Natural forces aspects
- Accidental Aspects
These type of assets are under utilised. Optimum economic benefit of the land and building is not achieved.
A residential building existing on the plot which is placed in commercial zone is glaring example of economic obsolescence. Highest and Best use of land and building is not made. The asset is put to inferior usage of residence instead of commercial use resulting in an economic loss. Higher depreciation in such case will not be unreasonable.
Similarly due to legislative enactment and policies also property may remain under utilised. The policy of government to protect slums and not to permit removal of unauthorized hutments in the plot without providing free alternate accommodation to dwellers is yet another example of economic obsolescence.
Dilapidation of building or heavy structural repair cost for the building is also economic obsolescence. The structure becomes uneconomic to maintain. Due to dilapidation, repair costs becomes prohibitive. Similar situation arises when rental value of the premises in a particular locality falls severely either due to bad neighbourhood or due to migration of the population to the buildings in newly developed town centres having better amenities.
These types of assets are out dated and their planning and designing are of types which are contrary to the present day requirements of its users. An old palace becomes obsolete for usage as there is no demand for such palaces in the market though they are in good structural condition. Due to this functional obsolescence many palaces are converted for hotel users for which there is high demand and usage in the market. Old chawl buildings with common toilet blocks is yet another example of functional obsolescence.
A brand new machine or a computer may suffer from functional obsolescence hardly within two or three years period if more advanced technologies introduce much superior product at much lesser cost.
Old load bearing structures with thick walls are not preferred now in the city areas. Every one now desires to stay in high rise R.C.C. framed structures having thin partition and external walls. This is now possible due to technological advancements. Timber structures are also now replaced by R.C.C. framed or steel framed constructions. Wooden windows are replaced by aluminium windows. Now modern technologies and planning concepts have made it possible to design and erect even an intelligent building.