The appreciation rate is the percentage increase in the market value of a property over a given period. It is calculated as the difference of the value in one period from the value of the previous period, over the value of the previous period. Understanding recent trends in appreciation rates is very important for commercial property investment decision making.
The yearly rate of appreciation can be calculated as follows:
At = Vt-Vt-1/Vt-1
At = Appreciation rate for year t
Vt = Property value in year t
Vt-1= Property value in the previous year (t-1)
The appreciation rate overlaps to some extent with the capital return concept, but the calculation of the latter may differ. Also notice that the concept of capital return encompasses and the case that property value decreases (in which case it is referred to as depreciation), while appreciation refers only to value increases.
The term appreciation in property is synonymous to property value increase, or capital growth. Property value appreciation occurs mainly as a result of market forces and supply shortages, capital improvements, better management, urban infrastructure improvements and developments that make the location of a property more attractive. Understanding the forces that cause properties to appreciate in value can help make better and more profitable property