APPRECIATION

&
DEPRECIATION OF
VALUE
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I. INTRODUCTION
a) Inflation
b) Depreciation (appreciation)
c) Building deterioration

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III. DEPRECIATION & OBSOLESCENCE IN
BUILDINGS
• Loss or decline in value of a property
• Depreciation categories
– Physical depreciation (observable, unobservable, curable, incurable)
– Functional obsolescence (as above)
– Economic obsolescence (due to external factors)
• Unsuitable environmental factors
• Changes in zoning
• Property under/overdevelopment
• Shifts in population
• Road & main routes diversions

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III. DEPRECIATION & OBSOLESCENCE OF
LAND
• Land sometimes depreciates in value
• Physical depreciation (not common: erosion,
pollution, overgrazing)
• Functional obsolescence (parcel size)
• Economic obsolescence (common)

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III. DEPRECIATION VS CAPITAL GROWTH
• Business cycle
• Real estate cycle
• Demand & supply
• Depreciation or capital growth

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IV. ACCRUED DEPRECIATION DETERMINATION
• Determination of accrued depreciation by inspection

– By this method, the property is inspected and notes made

on the three types of depreciation:
• Physical deterioration (curable & incurable)
• Functional obsolescence (curable &incurable)
• Economic obsolescence

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V. ACCRUED DEPRECIATION DETERMINATION
• Determination of accrued depreciation by
mathematical methods:
i) The Straight line method
ii) The Fixed Percentage method
iii) The Sinking Fund method
iv) Sum of the years’ digits method
v) Double declining balance method
vi) 150% and 125% method
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A) THE STRAIGHT LINE METHOD
• Concept may be applied on the basis of physical or economic life
projection
• A building is depreciated evenly over its estimated lifespan
• Challenge is to determine either economic or physical life of a
building
• Depreciation is seldom even over the lifespan of the building
• Building economic life taken as 100% and value reduced every year
by an annual depreciation rate
• Accumulated depreciation = effective age * annual rate
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A) THE STRAIGHT LINE METHOD
Item Description Quantity

1 New building replacement value 8,000,000.00

2 Average economic life of similar buildings (years) 50.00
3 Remaining life (years) 40.00
4 Effective age (years) 10.00
5 Depreciation rate (100/50 years) 2%
6 Percentage accumulated depreciation (10 years*2%) 20%
7 Accumulated depreciation (8,000,000.00*20%) 1,600,000.00
MK1,600,000.00

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A) THE STRAIGHT LINE METHOD
• Method mainly a book keeping one for companies to
write off depreciation amount every year on fixed
assets.

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B) THE FIXED PERCENTAGE METHOD
• Fixed percentage deducted every year from the depreciable
value of the building as shown in the table below
• Depreciation amount decreases every year & it will never
reach nil
• Reduction in depreciation amount regarded as not a true
reflection of what happens in property market
• Method considered not suitable for valuation purposes

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B) THE FIXED PERCENTAGE METHOD
Value at year
Year beginning Depr rate Depr amount Accrued Depr Percent

1 500,000.00 0.04 20,000.00 20,000.00 4.00

2 480,000.00 0.04 19,200.00 39,200.00 7.80

3 460,800.00 0.04 18,432.00 57,632.00 11.50

4 442,370.00 0.04 17,694.80 75,326.80 15.10

5 424,680.00 0.04 16,987.20 92,314.00 18.50

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III) THE SINKING FUND METHOD
• Similar to the straight line method
• Difference is that theoretically amts invested at a safe rate to
replace building
• The accrued depreciation for a specific period, the sinking
fund factor for the average economic life of that particular
kind of bdg @ the given safe rate is multiplied by the factor
for the average economic life of that particular kind of bdg @
the given safe rate, & the result is multiplied by 1 for every
year of the effective age of the bdg.

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IV) SUM OF THE YEARS’ DIGITS METHOD
• Requires physical/economic life estimate for a building
• Digits or years are totaled
• Salvage value estimated & subtracted from cost factor
• Depreciation as a pro-rata amt calculated on the basis of
the remaining lifespan over sum of years’ digit, multiplied
by the difference between cost & salvage value
• Each year’s depreciation is the difference between cost &
salvage value

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V) DOUBLE DECLINING BALANCE
• Similar to the straight line method
• Requires an estimate of lifespan
• Different in that it doubles straight line %
• Where straight line requires 10%, this method
requires 20%

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VI) 150% & 125% METHODS
• Same as double declining method

• Instead of 200%; 150% & 125% of the straight line

percentage is used.

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VII) PRACTICAL APPLICATION OF
DEPRECIATION
Four golden rules in determining depreciation:

1. Take note of the shortcomings of the method in the valuing

process;
2. Avoid calculating depreciation for valuation purposes as far
as possible;
3. Use the inspection method if depreciation must be
calculated; &
4. Exercise great care in depreciation determination.
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 THANK YOU
FOR
YOUR ATTENTION

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