Real Estate Valuation: The Measurement Of Depreciation In The Cost Approach To Valuation

PURPOSE: It has been embarrassing to the valuation profession where it is found that its professional practices have been little more than educated guesses. This has been particularly true in the estimation of depreciation in the use of the cost method for valuing land and buildings and plant and machinery. The study set out to investigate current models adopted for the measurement of depreciation in Nigeria, examine the patterns of depreciation for residential properties in the study area and evaluate the conformity of the identified models to depreciation patterns. These were with a view to improving cost valuation practice.METHODS FOLLOWED: Questionnaire were administered on a cross sectional surveys of 154 valuation firms across Southwestern Nigeria to address the three questionsFINDINGS: The study found that current models adopted by valuers for the measurement of depreciation of residential buildings were the estimated percentage model and age life models. However, the pattern of depreciation was found to follow an S shape. An analysis of the models usually adopted vis-a-vis the S shaped depreciation pattern using the Student t-test showed no significant relationship.. This showed that the use of depreciation in the cost method of valuation has accuracy deficiencies. Other tests demonstrated that depreciation measurement is user-friendly but is inconsistent and incapable of separating depreciation components.THEORETICAL AND PRACTICAL IMPLICATIONS: The paper has discomforting implications for the reliability of professionally prepared valuation estimates for residential property and calls for urgent corrective action along the lines of S shaped depreciation.ORIGINALITY: The paper expands and improves on earlier depreciation measurement studies which were restricted in terms of geographical scope and methodology...