Estimation and Quantity Surveying

Unit-V: Valuation

Prepared by

Mr. M S Yuvaraj
Assistant Professor
Department of Civil Engineering

SREE VIDYANIKETHAN ENGINEERING

COLLEGE
(AUTONOMOUS)
Sree Sainath Nagar, A. Rangampet, Tirupati – 517 102
(Affiliated to JNTUA Anantapuramu, Approved by AICTE, Accredited by NBA; NAAC ‘A’ Grade)
Contents:
 Introduction
 Necessity of Valuation
 Important terms in Valuation
 Types of Valuation
 Value of building
 Calculation of standard rent
 Mortgage
 Lease
VALUATION
Valuation:
 Valuation is a quantitative process of determining
the fair value of an asset or a firm. It means,
fixation of cost or return expected of a building,
engineering structure or project (Govt. or private), at
present day rates.

 The value of a structure may be more or less

depending upon the present utility of a structure.
 Eg: A house having a number of rooms but smaller in
size will fetch less value than a house, which is well
planned having proper sizes of rooms.
Necessity of Valuation:
 Rent fixation.
 For buying and selling
 Acquisition of property by Government
 To be mortgaged with bank or any other society to
raise loan.
 For various taxes to be given and fixed, by the
Municipal Corporation
 For taking out an insurance policy.
 Factors require consideration for valuation:
 Locality:
 In case a building is located in such an area, where there
is easy access to market, schools and is located on road
side. The orientation of the building is according to
Engineering rules. It will fetch more cost than a building
which is in neglected condition and is located at
unhealthy locality.

 Structure:
 If a building is constructed according to specifications,
material used is of the good quality, workmanship is
attractive and the building is properly maintained, it will
fetch more cost than the building in a neglected form
with poor quality of material used.
Important Terms in Valuation:
 Value:
 Present day cost of a Engineering structure (saleable
value)

 Cost:
 Original cost of construction. It is used to find out the
loss of value of property due to various reasons.

 Gross Income:
 Total amount of the income received from a property
during the year, without deducting outgoing.
 Net Income:
 An amount left at the end of the year after deducting all
usual outgoings.

 Outgoings:
 These are expenses which are incurred on a building so
that it may give back revenue.
 Annual taxes paid by the owner (wealth tax, property
tax, municipal taxes etc. (10% to 25% of net income)
 Maintenance of a building
 Annual repairs of the building (10% of the gross
income)
 Sinking fund
 Premium given against fire or for theft policy.
 Obsolescence:
 The value of property decreases if its style and
design are outdated i.e., rooms not properly set,
thick walls, poor ventilation. The reasons of this is
fast changing techniques of construction, design,
ideas leading to more comfort etc.

 Free hold Property:

 Any property which is in complete possession of the
owner is known as ‘free hold property’. The owner
can use the property in any way he likes.
 Lease hold:
 If a property is given to some person on yearly
payment basis by the free holder, then the property
is called ‘lease hold property’ and the person who
takes the property is called lease-holder.

 Easement:
 An easement is a right which the owner or occupier
of certain land possesses, as such, for the beneficial
enjoyment of that land, to do and continue to do
something, or to prevent and continue to prevent
something being done, in or upon, or in respect of,
certain other land not his own.
 An owner getting facilities over the property of
another person, the following facilities is known as
easements.
 Facility of running water and sewer pipes through
other’s land
 Facility of air and light
 Facility of drainage of rain water
 Facility of access

 The owner who gives facilities is known as ‘servient

owner’ and who enjoys facilities is called ‘dominant
owner’.
 Scrap Value:
 If a building is to be dismantled after period of its
utility is over, some amount can be fetched from the
sale of old materials. This amount is known as ‘scrap
value’ of a building.

 Salvage Value:
 If a property after being discarded at the end of
utility period is sold without being broken into pieces,
the amount fetched by sale is known as ‘salvage
value’.
 Distress Value:
 Due to fear of war, riots, earthquake etc., the market
value of a property cannot fetch existing market
value. This is termed as ‘distress value’. This gives
advantage to the purchaser.

 Monopoly Value:
 Any property having special advantage due to
design, location, size, shape etc., if liked by someone
for purchase, has to give that amount which the
owner demands. This value is called ‘monopoly
value’.
 Replacement Value:
 In case if another property is to be constructed by
replacing the existing one, the cost incurred on this
replacement either full or part at the prevailing
markets rates for labour and material, is called
‘replacement value,.

 Sentimental Value:
 In certain properties feelings of the owner are
attached with the property. In such cases, the owner is
not willing to sell whereas purchaser willing to
purchase offers such a price which is higher than its
market value. This offered value is called ‘sentimental
value’.
 Value of a Property:
 The Value of a property is listed into various different
categories such as;
 Market Value
 Book Value
 Capital Cost
 Capitalized Value
 Market Value:
 The market value of a property is the amount which
can be obtained at any particular time from the open
market if the property is put for sale. The market
value will differ from time to time according to
demand and supply.

 The market value also changes from time to time for

various miscellaneous reasons such as changes in
industry, changes in fashions, means of transport,
cost of materials and labour etc.
 Book Value:
 Book value is the amount shown in the account book
after allowing necessary depreciation.

 The book value of a property at a particular year is

the original cost minus the depreciation allowed per
year and will be gradually reduced year to year.

 At the end of the utility period of the property, the

book value will be only scrap value.
 Depreciation:
 A structure, after sometime gradually losses some
of its value due to its constant use and some other
reasons such as
 The property in neglected condition
 The property being away from schools & market
 Design being out of fashion
 Poor specifications followed which require
recurring maintenance.
 Depreciated Value, D = P[(100-rd)/100]n

where, D = Depreciated value

P = Present value
rd = Fixed percentage of depreciation
n = Number of years the building has
been
constructed in existence
 Present Value:
 The present value of the building can be found out
using any of the following methods:
 Cost from the Record:
 The cost of construction can be determined from

the estimations, the bill of quantities and using

the present-day rate of building materials and
labors.

 Ifthe actual cost of construction of the building is

known, this cost can be manipulated by using
the percentage of increase or decrease to the
present-day rate of materials and labors.
 Cost by Detailed Measurement:
 If the old record is unavailable, then the

construction cost can be calculated by a detailed

measurement of the building and preparing the
bill of quantities of various work items.

 The present rate of materials and labors are used

to calculate the cost of the building.
 Cost by Plinth Area Method:
 Plinth area method of calculating the cost of a

building is simpler than the detailed

measurement method which is laborious and
lengthy.

 Inthis method, the plinth area of the building is

measured and calculated. The plinth-area rate of
a similar building in the locality is obtained by
inquiry, and the cost is calculated.
 Fixed percentage of depreciation:
 As the time passes, due to constant use, wear and
tear, the cost of the building depreciates. This
depreciation increases with the time.

 The following are the values of rd for different

structures.
 Structure with 80-100 years life rd = 1
 Structure with 70-75 years life rd = 1.3
 Structure with 50 years life rd = 2
 Structure with 25 years life rd = 4
 Structure with 20 years life rd = 5
 Capital Cost:
 Capital cost is the total cost of construction including
land, or the original total amount required to possess
a property.

 It is the original cost and does not change while the

value of the property is the present cost which
Valuation methods may calculate.
 Capitilized Value:
 The capitalized value of a property is the amount of
money whose annual interest at the highest
prevailing interest rate will equal the net income
from the property.
 To determine the capitalized value of a property, it is
required to know the net income from the property
and the highest prevailing interest rate.
Capitalized Value = Net income x Year’s
purchase
 Year’s purchase is defined as the capital sum
required to be invested in order to receive a net
annual income as an annuity of rupee one at a fixed
rate of interest.

 The capital sum should be 1×100/rate of interest.

 Thus to gain an annual income of Rs x at a fixed rate

of interest, the capital sum should be x(100/rate of
interest).

 But (100/rate of interest) is termed as Year’s

Purchase.

Capital Sum = Annual income x Year’s

Solved Problems
 The estimated cost of a building is Rs.20,00,000. It is
20 years old & well maintained. The life of the
structure is assumed to be 80 years. Work out the cost
of building for acquisition.

P = 20,00,000
rd = 1
n = 20

Depreciated value = 20,00,000 [(100-1)/100]20

= Rs.16,35,814
 A plot measures 500 sq.m. The built up area is 300 sq.m.
The plinth area of this 1st class building is Rs.6000 per
sq.m. This rates includes cost of water supply, sanitary
and electric installations. The age of the building is 40
years. The cost of the land is Rs.5000 per sq.m. Determine
the total value of property.

cost of land = 500 x 5000 = Rs.25,00,000

cost of building = 300 x 6000 = Rs.18,00,000
life of building is 40 years, so rd = 2.5
Depreciated value = 18,00,000[(100-2.5)/100]40
= Rs.6,53,819
Total value of property = 25,00,000 + 6,53,819 =
Rs.31,53,819
 Sinking Fund in Construction:
 It is a fund which is gradually accumulated and set
aside to reconstruct the property after the expiry of
the period of utility.

Annual sinking fund, I = {Si/[(1+i)n-1]}

Where, I = Annual installment required

n = Number of years required to create
sinking fund
i = rate of interest expressed in decimal
S = Amount of sinking fund
Solved Problems
 A printing machine is to be installed at a cost of
Rs.30,000 in a press. Assuming the life of the machine
as 20 years. Calculate the amount of annual investment
of sinking fund to be deposited to accumulate the whole
amount at 5% compound interest.

S = Rs.30,000
i = 0.05
n = 20

The annual sinking fund, I = {(30000x0.05)/[(1+0.05)20-

1]}
= Rs.907.28
 An old shop in the main market has been purchased by a
person at a cost of Rs.20,000. Work out the amount of
annual sinking fund at 3% interest assuming future life of
the building as 15 years and scrap value of the building
as 10% of the cost of purchase.

cost of the shop = Rs.20,000

scrap value = 20,000 x 0.1 = Rs.2000
sinking fund to be accumulated after 15 years =
Rs.18,000

annual installment of sinking fund, I =

{(18000x0.03)/[(1+0.03)15-1]}
= Rs.967.81
Methods of Valuation of Buildings
 Following are the different methods of valuations of the
property:
 Rental Method of Valuation
 Direct comparison with capital value
 Valuation based on profit
 Valuation based on cost
 Development method of valuation
 Depreciation method of valuation
 Rental Method:
 In this method, net income from the building is
calculated by deducting all the outgoings from gross
rent. Year’s purchase (Y.P.) value is calculated by
assuming a suitable rate of interest prevailing in the
market.

 The net income multiplied by the year's purchase

gives the capitalized value or the valuation of the
property. This method is used only when the rent is
known or probable rent is determined by enquiries.
 Direct Comparison with Capital Value:
 When the rental value is not known, this method of
direct comparison with the capital value of a similar
property of the locality is used.

 In this case, the valuation of the property is fixed by

direct comparison with the valuation or capitalized
value of similar property in the locality.
 Valuation based on Profit:
 This valuation method is suitable for commercial
properties such as hotels, restaurants, shops, offices,
malls, cinemas, theaters, etc. for which the valuation
depends on the profit.

 In such cases, the net annual income is used from

the valuation after deducting all the outgoings and
expenses from the gross income.

 The valuation, in this case, can be too high in

comparison with the actual cost of construction.
 Valuation based on Cost:
 In this method, the actual cost of construction of the
building or the cost incurred in possessing the
building is considered as the basis to determine the
valuation of the property.

 In this case, necessary depreciation is allowed and

points of obsolescence are considered.
 Development method of valuation:
 This method is suitable for properties which are
under the developmental stage. For example, if a
large place of land is to be divided into plots after
provision for roads and other amenities, this method
is used.

 The probable selling price of the plots, the area

required for amenities and other expenditures for
development is considered for valuation.
 The development valuation method is also used for
properties or buildings that must be renovated by
making alterations, additions, improvements, etc.
The value is calculated based on the anticipated net
income generated from the building after renovation
work is complete.
 Depreciation Method of Valuation
 Based on the depreciation method, the valuation of
the buildings is divided into four parts:
 Walls
 Roofs
 Floors
 Doors and windows

 The cost of each part at the present rate is calculated

based on detailed measurements.

 The valuation calculated is exclusive of the cost of

land, amenities, water supply, electrical and sanitary
fittings etc.
Standard Rent:
 Standard rent means the rent which is calculated and
prescribed by competent authority on the basis of
capital cost of a residence owned by Government or
leased residence meant for Government employees.

 The total expenditure incurred on the construction (i.e.,

cost of building, water supply, sanitary and electric
installations etc.) is calculated @ 6% interest and
divided it by 12, which will give rent per month.

 If a land is purchased for the construction of the

building, its cost should also be added while
calculating the standard rent.
 In case of private properties, the Net income is worked
out by dividing the capitalized value by a proper figure
of year’s purchase.

 To get the gross rent, outgoings such as annual repairs,

municipal taxes, property taxes and sinking funds etc.
are added to the net income. This gross rent is divided
by 12, which will give rent per month.

 In case of private properties, the rent depends upon

the situation, demand, type of construction,
accommodation and facilities provided.
 Fair rent:
 It is rent of a building fixed on total cost of the
building. The total cost includes market value of the
site, cost of construction of the building and total
cost of additional amenities provided such as lift, air
conditioner, play ground, boundary wall, coolers etc.

 For residential building, it is 9% gross return per year

on the total cost and for non-residential building, it is
12% gross return per year.
 A residence is to be constructed over a plot of land
measuring 600 sq.m. The bye-laws permit for a 30%
of covered area. The constructions to be done is of A
class specifications. Also add for services @ 30% of the
total cost. The water supply is from a common source.
Calculate the total cost of construction. Also calculate
standard rent.

Sol: covered area = 30% of 600 = 180 sq.m.

assume rate per sq.m. = Rs. 5000
rough cost estimate = 180 x 5000 = Rs. 9,00,000
services @ 30% = Rs. 2,70,000
total cost = 9,00,000 + 2,70,000 = Rs.11,70,000
rent @ 6% = (11,70,000 x 6)/100
= Rs. 70,200

Standard rent = 70,200/12

= Rs. 5,850
 An R.C.C. framed structure building having an
estimated future life of 80 years, fetches a rent of
Rs.2,200 per month. Work out its capitalized value
based on a 6% net yield. The rate of compound
interest for sinking funds may be 4%. The other
outgoings are:
 Repair & maintenance = 1/12 of gross income
 Municipal & property taxes = 25% of gross income
 Management & miscellaneous = 7% of gross income

The plinth area of the building is 800 sq.m. & cost per
sq.m. may be taken as Rs.500 per sq.m.
Sol: gross annual rent = 2200 x 12 = Rs. 26,400
rate of compound interest = 4%
life of building = 80 years
cost of the building = 800 x 500 = Rs.4,00,000

outgoings:
repair & maintenance = 26400/12 = Rs.2,200
municipal taxes = 0.25 x 26400 = Rs.6,600
management & miscellaneous = 0.07 x 26400 =
Rs.1,848
sinking fund = (400000x0.04)/[(1+0.04)80-1] =
Rs.726
 total outgoings = 2200+6600+1848+726 = Rs.
11,374
net income = 26400 – 11374 = Rs.15,026
capitalized value = net income x year’s
purchase
year’s purchase = 100/rate of interest = 100/6

capitalized value = 15026 x (100/6) =

Rs.2,50,434
 Calculate the annual rent of a building with the
following data:
cost of land = Rs.2,00,000
cost of building = Rs.8,00,000
estimated life = 80 years
return expected = 5% on land
= 6% on building
annual repairs are expected to be 0.8% of the
construction cost, and other outgoings will be 25% of
the gross rent. There is no proposal to set up a sinking
fund.
Sol:
amount of return required on land = 0.05 x 200000 = Rs.10,000
amount of return required on building = 0.06 x 800000 =
Rs.48,000
net income = 10000 + 48000 = Rs.58,000

let gross rent per annum = x

amount of annual repairs = 0.8% of 800000 = Rs.6,400
amount for other outgoings = 0.25x
net income = gross income – outgoings
58000 = x – 6400 – 0.25x
=> 0.75x = 64400
=> x = Rs.85,867 per annum

rent per month = 85867/12 = Rs.7,156

Mortgage
 Loans may be of two types:
 Secured debt
 Unsecured debt

 A mortgage is the transfer of an interest in specific

immovable property for the purpose of securing the
payment of money advanced or to be advanced by way
of a loan, an existing or future debt, or the performance
of an engagement that may give rise to a pecuniary
liability.

 The person who needs a loan and gives his property as

security is a ‘mortgagor’ while the person giving the
loan is a ‘mortgagee’.
 Kinds of mortgage:
 Simple mortgage:
 It is a kind of mortgage where, without delivering
possession of the mortgaged property, the
mortgagor binds himself personally to pay the
mortgage money and agrees that, in the event of
his failure to pay according to his contract, the
mortgagee shall have a right to cause the
mortgaged property to be sold.
 Mortgage by conditional sale:
 It is a kind of mortgage where the mortgagor
ostensibly sells the mortgaged property
 on condition that on default of payment of the

mortgage money on a certain date the sale shall

become absolute, or

 oncondition that on such payment being made

the sale shall become void, or

 oncondition that on such payment being made

the buyer shall transfer the property to the seller
 Usufructuary mortgage:
 It is the kind of mortgage where, the mortgagor
delivers possession or expressly or by implication
binds himself to deliver possession of the
mortgaged property to the mortgagee and
authorises him to retain such possession until
payment of the mortgage-money, and to receive
the rents and profits accruing from the property or
any part of such rents and profits and to
appropriate the same in lieu of interest, or
payment of the mortgage-money, or partly in lieu
of interest partly in payment of mortgage money.
 English mortgage:
 It is a kind of mortgage where, the mortgagor
binds himself to repay the mortgage money on a
certain date, and transfers the mortgaged property
absolutely to the mortgagee, but subject to a
provision that he will re-transfer it to the
mortgagor upon payment of the mortgage-money
as agreed.
 Mortgage by deposit of title deeds (Equitable
mortgage):
 It is a kind of mortgage created by the borrower in
favour of the lender by deposit of title deed of
immovable property as a security to a lender until
the loan is fully paid.

 No legal documentation takes place but both parties

sign an agreement which is signed by the notary.

 Equitable mortgage can be effectuated only in the

towns which are notified by the concerned State
Governments.
 Anomalous mortgage:
 In the case of an anomalous mortgage the rights
and liabilities of the parties shall be determined by
their contract. Such agreement which is made
between the mortgagor and the mortgagee
according to their terms and conditions is called an
anomalous mortgage.
Lease:
 A lease refers to a contract where one party grants a
right to use a property or land to another party in
return for consideration and for a specific period of
time.

 Both the parties enter into a lease agreement

specifying the terms and conditions of the agreement.

 The party who owns the leased premises or property is

the lessor and the party accepting the leased property
is the lessee.
 Types of lease:
 The main types of lease are:

 Building lease
 Occupation lease
 Building lease:
 The owner of a freehold land leases out his plot of land
to somebody to construct a building, on payment of a
yearly ground rent by the leaseholder.

 The leaseholder constructs the building and maintains it

at his expense and earns some rent from the building.

 At the end of the lease period the lessor has got the
right on his land together with the structure on the
land.

 This type of lease is granted for long period for 99 to

999 years.
 Occupation lease:
 In this case the building or the structure is built by the
owner and the built up property is given on lease for
the purpose of occupation for a specified period on
payment of certain amount of annual rent.

 The lease period will depend on the purpose for which

the structure or building has been constructed.

 In occupation lease the maintenance of the building or

structure is usually done by the leaseholder which may
be provided in the lease deed.