Property Valuation: Integration of Methods and Determination of Depreciation

Property valuation up to now is a global guess. On the one hand we have the Investment Method which regards a property as just a sum of money, on the other hand we have the Contractor's Method which is based on the actual new construction costs of the building and the actual value of the land. Both methods in some way take depreciation into account but clarify only in very global terms how the loss of value has to be estimated. When we regard a building as a set of stocks of services with differentiating life spans, depreciation can be estimated and thus the resulting value of the building. The three methods will be integrated now. The Investment Method is used to estimate the maximum total investment in circumstances of free development, based on the market rent to be expected and the required return on the (virtually) invested capital. From this the land's value can be estimated by reducing the total investment with the construction costs. Since the existing building has to be valued separately form the land, the Contractor's Method will be used. The loss of value on the initial building investment (at the actual price level) will be estimated by defining the appropriate stocks of services and related life spans. The land's and the building's value can now be combined in order to find the property value