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Effective age and depreciation

Writer's picture: Tristan Doger de SpevilleTristan Doger de Speville

Often, I face an amusing situation when doing site visits. While going around the property, the client will usually tell me the property's actual age without me asking, and I always answer, "don't worry, it does not matter." Their eyes open wide, and they look at me half confused and angry, undoubtedly thinking that they made a big mistake working with me.


In this article, I will try to explain the concept of depreciation when I assess properties using the Depreciated Replacement Cost or DRC. It is the difference between Actual Age and Effective age.


Actual age is the chronological age since the structure was completed, usually reported in years.


Now, have you ever thought about how different aspect of your property might impact its age? How long should your roof structure last? How about your air conditioners? Services and fixtures? The internal layout? What if you put an addition to your house?

As a general rule, any of those items will physically last longer than their appearance or uses. Changing, upgrading, adding or replacing these will affect your property depreciation; we then talk about effective age.


Effective age is defined as the estimated age of a structure based on its utility and physical wear and tear at the assessment date. It can be less, equal, or more than the property actual age depending on maintenance, renovation, type of use, functionality, and other improvements. It reflects the true remaining life of the property, taking into account all matter other than the construction date.


It is an essential concept that all property persons should know. When visiting properties, the appraiser should take specific care to assess the effective age to ensure that the depreciation rate used in the calculation is fair and representative of the building condition. Always using the actual age in the analysis will lead to erroneous and unfair results.


Determining the effective age of a structure is a matter of judgement from the appraiser, considering all factors.

When doing site visits, I ask myself: 'How old do you think the property is by looking at it without knowing its actual age?' But there is more to it. To answer the question and reach an effective age, I have to rely on three main aspects:


  • The physical/structural aspect: actual condition of the structure, renovations, replacements, additions will be considered here.

  • The functional aspect: is the structure still usable for its purpose?

  • The economic aspect: is there still demand for the property as it is?


But there are other aspects to consider, but those three are enough to have a solid judgement. It can be a confusing concept, so let's have a look at three examples.



Example 1


Consider two houses built in 1980 and made of similar materials. They are both 40 years old now (actual age). House 1 has never been upgraded, only essential maintenance. House 2 has been repainted many times, openings changed, and the kitchen was redone. It would be unfair to depreciate both the same way as house 2 looks and is newer. Thus, house 1 will have an effective age of 60 years while house 2 only 20.


Example 2


Now let's see a slightly more complex one. Consider a house in Curepipe build in 1960 like most houses there are. It has been renovated and looks new, not a crack but still has the same initial layout with many rooms, tight corridors and poor lightning. Considering the three main depreciation we have:


  • Physical/structural: good, like new.

  • Functional: poor, modern houses are built on an open layout and good lightning.

  • Economical: poor, the market nowadays prefer modern houses with open layout.


Thus, even if structurally sound, the effective age will be relatively high due to the functional and economic factors impacting its marketability and demand.three examples.


Example 3


Consider a warehouse built five years ago, open layout, suitable modern metal fabrics. It is used to store heavy construction materials transposed by large vehicles and is located close to the sea with inshore wind. In this case, the functional and economical are reasonable. However, physical depreciation will be more than five years as the heavy machines damage the structure, and the corrosion impacts the metal frames. Thus I could use 20 years effective age compared to 5 years actual age.


To reach a final depreciation rate, I need to multiply the fair and reasonable effective age by the average depreciation rate per annum of the structure. The result would be the overall depreciation rate of the structure as at the date of assessment.


In sum, effective age is a matter of judgment and observation based on more than the structure's physical condition, while actual age is purely mathematical. It would be unfair to depreciate using the property's actual age as it does not represent the building's actual state and condition. This explains why 'don't worry, it does not matter' does not make me a crazy valuer!

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