Land Appreciation vs Building Depreciation: Understanding the True Value of Developed Property Over Time

One of the most misunderstood concepts in real estate valuation is the simultaneous appreciation of land and depreciation of buildings. While land is generally finite and appreciates over time, buildings are physical assets subject to wear, functional obsolescence, and design aging. The interaction of these two forces determines the actual market value of a developed property.

This article explains how these forces work together, illustrates their combined effect over time using a numerical example, and clarifies the difference between market value and accounting depreciation commonly applied to buildings.

The Core Principle in Property Valuation

A developed property is not a single asset. It is a composite of two distinct components:

Land – a non-depreciating asset that typically appreciates due to scarcity, infrastructure growth, zoning, and demand.
Building (Improvements) – a depreciating asset whose value declines due to physical deterioration, functional obsolescence, and changing market preferences.

Market value = Land value (appreciating) + Building value (depreciating)

The key question is not whether a building depreciates—it does—but whether land appreciation outpaces building depreciation, and by how much.

Assumptions for the Illustration

To demonstrate the balancing effect, we assume the following realistic but simplified scenario:

Property type: Detached residential house in an established urban suburb
Valuation basis: Market value (not book value)
Initial valuation date: January 2021
Initial land value: KES 20,000,000
Initial building value: KES 15,000,000
Total property value (2021): KES 35,000,000

Assumed annual rates:

Land appreciation: 8% per annum (moderate urban growth)
Building depreciation: 2.5% per annum (market-based, not accounting)

Market Value Movement Over Time (2021–2026)

Illustrative Property Value Breakdown

Year (January)	Land Value (KES)	Building Value (KES)	Total Market Value (KES)
2021	20,000,000	15,000,000	35,000,000
2022	21,600,000	14,625,000	36,225,000
2023	23,328,000	14,259,000	37,587,000
2024	25,194,240	13,902,525	39,096,765
2025	27,209,779	13,554,962	40,764,741
2026	29,386,561	13,216,088	42,602,649

What This Table Demonstrates

1. The Building Loses Value Every Year

The building depreciates steadily, losing approximately KES 1.78 million in market value over five years.

This decline reflects:

Physical wear and tear
Aging finishes and fittings
Design becoming less competitive relative to new developments

Importantly, this is economic depreciation, not accounting depreciation.

2. Land Appreciation More Than Compensates

Over the same period, land value increases by approximately KES 9.39 million, driven by:

Urban growth
Infrastructure expansion
Increased demand and limited supply
Improved neighbourhood profile

3. Net Effect: Overall Property Value Increases

Despite the building depreciating, the total property value rises by over KES 7.6 million, a gain of roughly 21.7% over five years.

This is why, in strong urban locations, well-located older properties often appreciate despite aging structures.

Extending the Logic to a 10-Year Holding Period

Over a longer horizon (10–15 years), three outcomes typically emerge:

Land dominates value – land may represent 70–85% of total value.
Building becomes secondary – often contributing marginal value.
Redevelopment potential increases – highest and best use shifts from occupation to redevelopment.

This explains why older houses in prime locations are frequently sold “as land value,” even though the buildings remain usable.

Market Depreciation vs Accounting Depreciation

A critical distinction must be made between valuation depreciation and accounting depreciation.

Accounting Depreciation of Buildings (Book Value)

From an accounting perspective, buildings are treated as depreciable fixed assets, typically using:

Straight-line depreciation
Over 25–50 years, depending on policy and tax regulations

Example:

Building cost: KES 15,000,000
Useful life: 40 years
Annual depreciation: KES 375,000

After 5 years:

Accumulated depreciation: KES 1,875,000
Book value: KES 13,125,000

Key Characteristics:

Used for financial reporting and tax computation
Does not reflect market demand or location
Continues even if market value is rising

Why Accounting Depreciation ≠ Market Value

Aspect	Accounting Depreciation	Market Depreciation
Purpose	Financial reporting	Valuation & pricing
Basis	Cost & useful life	Demand, utility, condition
Reflects location value	❌ No	✅ Yes
Can show loss while value rises	✅ Yes	❌ No

A property can be fully depreciated in books yet sell at a premium due to land value.

Implications for Property Owners and Investors

1. Do Not Rely on Book Value to Assess Wealth

Book value understates property wealth in appreciating locations. Market valuation should always be used for:

Investment decisions
Financing
Sale or restructuring
Portfolio analysis

2. Land-Heavy Properties Offer Stronger Long-Term Security

Properties where land forms a higher proportion of value:

Are more resilient to building obsolescence
Offer redevelopment flexibility
Preserve capital better over time

3. Maintenance Slows Market Depreciation

While buildings depreciate, proper maintenance, renovations, and upgrades can:

Reduce the effective depreciation rate
Extend economic life
Improve rental and resale performance

4. Depreciation Is Not a Loss Until You Sell

Market depreciation of a building component is not a realised loss unless:

The property is sold below acquisition cost
Or redevelopment requires demolition

Strategic Insight for Developers and Valuers

For professional valuers, the interaction between land and buildings is central to:

Highest and best use analysis
Residual land valuation
Redevelopment feasibility studies

For developers, rising land value often signals the optimal timing for redevelopment, even when buildings remain structurally sound.

The apparent contradiction between building depreciation and property appreciation is resolved once land and improvements are viewed as separate economic assets. Over time, land appreciation typically outweighs building depreciation, particularly in established urban markets.

Understanding this balance is essential for:

Accurate valuation
Sound investment decisions
Proper interpretation of financial statements
Long-term real estate strategy

In real estate, the building ages—but land remembers the future.

Land Appreciation vs Building Depreciation: Understanding the True Value of Developed Property Over Time

Land Appreciation vs Building Depreciation: Understanding the True Value of Developed Property Over Time

The Core Principle in Property Valuation