Valuation

What is valuation?
Valuation is the technique of estimation or determining
the fair price or value of property such as building, a
factory, other engineering structures of various types,
land etc.
By valuation the present value of a property is defined.
The present value of property may be decided by its
selling price, or income or rent it may fetch.
The value of property depends on its structure, life,
maintenance, location, bank interest, etc.
Cost: means original cost of construction of purchase.

Purpose of valuation?
Buying or selling property: when it is required to buy or
to sell a property, its valuation is required.
Taxation: To assess the tax of property its valuation is
required. Taxes may be municipal tax, wealth tax,
property tax, etc., and all taxes are fixed on the
valuation of the property.
Rent fixation: in order to determine the rent of a
property, valuation is required. Rent is usually fixed on
certain percentage of valuation (6% to 10% of the
valuation).

Security of loans or mortgage: when the loans are
taken against the security of the property, its valuation
is required.
Compulsory acquisition: whenever a property is
acquired by law compensation is paid to the owner. To
determine the amount of compensation valuation of
property is required.
Valuation of a property is also required for insurance
etc.

Gross income: gross income is the total income and includes
all receipts from various sources the outgoing and the
operational and collection charges are not deducted.
Net income or net return: this is the saving or the amount left
after deducting all outgoings, operational and collection
expenses from the gross income or total receipt.
Sinking fund: A certain amount of gross rent is set aside
annually as sinking fund to accumulate the total cost of
construction when the life of the building is over. This annual
sinking fund is also taken as outgoings.

Scrape value: scrape value is the value of the
dismantled material. That means after dismantle we
will get the steel, brick, timber etc. in case of machines
the scrape value is metal or dismantle parts. In general
the scrape value is about 10 % of total cost of
construction. Scrape value = sale of useable material –
cost of dismantling and removal of the rubbish
material.
Salvage Value: it is the value of the utility period
without being dismantled. we can sale it as a second
handle.

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. This value is changes from time
to time for various reasons such as change in industry,
change on fashion, means of transport, cost of material
and labour etc.

Book value: Book value is the amount
shows in the account book after allowing
necessary depreciation. The book value of
property at a particular year is the original
cost minus the amount of depreciation
year. The end of the utility period of the
property the book value will be only scrape
value.

Rateable value: rateable value is the net annual
letting value of a property, which is obtained
after deducting the amount of yearly repairs
from the gross income. Municipal and other
taxes are charged at a certain percentage on the
rateable value of the property.
Annuity: is the annual periodic payments for
repayments of the capital amount invested by a
party. Annuity is either paid at the beginning or
at end of each period of instalment.

Year’s purchase(Y.P):
The capitalize value which needs to be paid once for all
to receive a net annual income of Re 1 by way of
interest at the prevailing rate of interest in perpetuity
(i.e for an indefinite period) or for a fixed no. of days.
* Suppose the rate of interest is 5% per annum. One
has to deposit Rs 100 to get Rs 5 per annum
Now, to get Re 1 he has to deposit 100/5 = Rs 20 per
annum
Therefore, YP = 100/ rate of interest =1/R

• In case of life of property is anticipated to be short
and to account the accumulation of sinking fund
and interest on income of the property to replace
capital, the year’s Purchase is suitably reduced.
- Years Purchase (Y.P) = 1/ (R+Sc)
Example: Calculate the value of years purchase for a
property if its life is 20 yrs and the rate of interest
is 5%. For sinking fund the rate of interest is 4.5%
Soln:
Here, R=5%, R1 = 4.5%
Y.P =1/(R+Sc)
Coeff. Of sinking fund (Sc) = R1/((1+R1)n-1) =0.0319
Y.P = 1/(.05+.0319)=12.21

Depreciation: is the loss in the value of the
property due to is use, life, wear, tear, decay and
obsolescence.
The general annual decrease in the value of a
property is known as annual depreciation.
Usually, the percentage rate of depreciation is
less at the beginning and generally increase
during later years.
Methods of calculating depreciation: 1) Straight
line method 2) constant percentage method 3)
Sinking fund method.

Obsolescence: The value of property or
structures become less by its becoming out of
date in style, in structure in design, etc. and
this is termed as Obsolescence.

Depreciation Obsolescence
1) This is the physical loss in the
value of the property due to
wear & tear, decay ect.
2) Depreciation depends on its
original condition, quality of
maintenance and mode of use.
3) this is variable according to the
age of the property. More the
age, more will be the amount
for the depreciation.
4) there are different methods by
witch the amount of
depreciation can be calculated.
1) The loss in the value of the
property is due to change of
design, fashion, in structure of
the other, change of utility,
demand.
2) obsolescence depends on
normal progress in the arts,
inadequacy to present or
growing needs etc.
3) this is not dependent on age of
the building. A new building
may suffer in its usual rent due
to obsolescence.
4) At present there is no method
of calculation of obsolescence.

• Outgoings
• Repair:
- It includes various types of repair such as annual repair,
special repairs, immediate repair, etc.
- Amount to be sent on repairs is 10 – 15 % of gross
income.
• Taxes
- Include municipal tax, wealth tax, income tax, property
tax etc.
- Paid by owner of the property annually and are
calculated on annual rental value of the property after
deducting the annual repairs 15 to 20% of gross
income.

• Sinking Fund
• Management and collection charges
- 5to 10% of gross income may be taken for this purpose
- For small building it may not necessary to considered it
• Loss of Rent
- As it may not be possible to keep whole of the premises
fully let at all times, in such cases a suitable amount
should be deducted from the gross rent
• Miscellaneous
- These include:
electrical charges for lighting, running lift, etc and are
borne by the owner
- 2 to 5% of gross rent is taken for these charges.

Note: If the outgoing are not given in the question
and are to be assumed, the following percentage
may be taken for solving the problems.
i. Repair @ 10% of the gross income or rent
ii. Municipal taxes @ 20% of the gross rent
iii. Property tax @ 5% of gross rent
iv. Management and collection charges @ 5% of
gross rent
v. Insurance premium @ ½% of gross income
vi. Miscellaneous charges @ 2% of the gross rent.

Valuation of real property:
• Valuation of building is depends on the type of
building. Its structure and durability, on the
situation, size, shape, width of road way, quality
of material used in the construction and present
day prise of material.
• Also depend on the locality if it is in market area
having high value then the residential area.
• And depending on the specialities in the building
like sewer, water supply, and electricity ect.
• The value of the building is determined on
working out its cost of construction at present
day rate and allowing a suitable depreciation.

• The age of the building is generally obtained from
record if available or by enquires or from visual
inspection.
• Present day cost may be determined by the
following methods:
• Cost from record: cost of construction may be
determined from the estimate, from the bill of
quantities, from record at present rate. If the
actual cost of the construction is known, this may
increase or decrease according to the percentage
rise or fall in the rates which may be obtained
from the public work department (PWD)
schedule of rates.

• Cost by detailed measurements: If record is
not available, the cost of construction may be
calculated by preparing the bill of quantities of
various items of works by detailed
measurements at the site and taken the rate
for each item as prevalent in the locality or as
current PWD schedule of rates.

Cost by plinth area basis: the above methods are
lengthy, a simple method is to calculate the cost
on plinth area basis. The plinth area of the
building as measured and the present day plinth
area rate of similar building in the locality is
obtained by enquiries and then the cost is
calculated.
• Method of valuation: the following are the
different methods of valuations:
1) Rental method
2) Profit based method
3) Depreciation method

Rental method of valuation: in this method, the
net income by way of rent is found out by
deducting all outing goings from the gross
rent. A suitable rate of interest as prevailing in
the market is assumed and year’s purchase is
calculated. This net income multiplied by Y.P
gives the capitalized value or valuation of the
property. This method is applicable when the
rent is known or probable rent is determined
by enquiries.

Valuation based on profit: this method of
valuation is suitable for buildings like hotels,
cinema theatres etc. for which the capitalized
value depends on the profit. In such cases the
net annual income is worked out after
deducting from the gross income all possible
working expressions, outgoings, interest on
the capital invested etc. the net profit is
multiplied by Y.P to get the capitalized value.
In such case the valuation may work out to be
too high in comparison with the cost of
construction.

Depreciation Method of Valuation:
• According to this method the depreciated value of the
property on the present day rates is calculated by the
formula:
D = P[(100 – rd)/100]n
Where,
D – depreciated value
P – cost at present market rate
rd – fixed percentage of depreciation (r stands for rate
and d for depreciation)
n – The number of years the building had been
constructed.
To find the total valuation of the property, the present value
of land, water supply, electric and sanitary fitting etc;
should be added to the above value.

The value of rd can be taken as given
in table below
S.N Life of Building rd value
1 75 – 100 1
2 50 – 75 1.3
3 25 – 50 2
4 20 – 25 4
5 <= 20 5

Fixation of rent:
• The rent of building is fixed upon the basis of certain
percentage of annual interest on the capital cost and
all possible annual expenditure on outgoings.
• The capital cost includes the cost of construction of the
building, the cost of sanitary and water supply work
and the cost of electric installation and alteration if
any.
• The cost of construction also includes the expenditures
on the following: a) raising, levelling and dressing of
site b) construction of compound wall, fences and
gates c) storm water drainage d) approach roads and
other roads within the compound.

• Net return is worked out based on
• Capita cost / Year’s purchase
• If the capital cost is not known, this may be
worked out by any method of valuation.
• The owner experts about 2% higher interest
than the prevalent interest to cover up the risk
of his investment.
• To this net return, all possible expenditures on
outgoings are added to get gross annual rent.
• Gross rent = net rent + out goings.

• Valuation of Land:
• Valuation of land is done by one of the three
methods as and where applicable.
1. Comparative method
2. Belting method
3. Hypothetical building schemes

• Comparative method: this is simplest and most
direct method. The method is based on instances
of other sales with dates of open comparative like
lands in the neighbourhood. So there are two
main factors on witch this method is based 1)
Sale prices and 2) similar neighbourhood lands.
• Sale prices should be recent.
• The method is based on the comparison of like to
like. Properties may be similar but each property
is unique so they can never be like. But we can
assess by using the following factors.

• Situation: position of the land means locality,
availability, type of people, nearby schools,
market, office, hospital etc.
• Size:
• Return Frontage:
• Front road width:
• Vistas:
• Nature of soil:

• Belting method of valuation: it is based on
the road frontage. Frontage land has a greater
value than back land. So in order to find out
the realistic value of land the entire plot is
divided into a number of convenient strips by
lines parallel to the centre line of the road.
• Each such type of land is known as belt.
• Then a relationship regarding the value and
the depth of each belt to the front belt is fixed
up. Then calculate the valves of each belt in
terms of first belt. Then summing up the value
of each belt.

• Normally the plot of land is divided in to three belts. The
depth of second belt is taken as 1 ½ times that of front belt
and the depth of the third belt at 1 ½ times the depth of the
second belt or depth remaining after second belt is
considered as the depth of third belt.
• Value of recessed land not lying within the perpendiculars
drawn on belting lines from the end point is valued at three-
fourth value in that particular belt of land.
• Value of the front belt is maximum. The second belt is valued
at 2/3 rate of the first belt and third belt value at half the rate
of the first belt.

• Hypothetical building scheme: in this
system value of a vacant plot of land is
estimated by capitalising the assumed
rent that can be obtained from the
building, if erected on the land after
developing the same, and then deducting
the cost of development and building.

• Procedure:
• From the total area of land find out the
permissible covered area = total area – one third
area of land as required for compulsory open
space under municipal by laws.
• Find out rentable area = total covered area – 20%
for area of wall and wastes.
• Calculate net rent per month = gross rent –
outgoings. Usually consider total outgoings be
30% of the gross rent.
• Find out years purchase for perpetual (changing)
with interest on capital at the current bank
deposit rate (should be minimum 10%)

• Capitalise the net rent by multiplying the year’s
purchase deferred for the development and
construction period.
• Consider the current plinth area and find out the
cost of the building from the total covered area.
For storied buildings the covered area shall be
worked out all the stories.
• Work out the development cost of land.( if
required)
• Find the total cost of building and development
cost of land.
• Deduct the total cost of building and
development from the deferred rental value of
the building to find the cost of land.

• Valuation of leasehold interest: there are two types of
properties namely
• Free hold property b) lease hold property
• A free hold property:
• The free hold is inherent the absolute owner of the
property , he holds it without any pavement in the
nature of the rent. He may sell the property, dived it or
donate or grant it on lease at his sweet will.
• The freehold or owner who grants the lease known as
‘lessor’ and leaseholder is known as ‘lessee’.
• In common practice it give as for 15, 21, 25 or 50
common in practice. When a lease is granted for a
period of 99 it is known as long term lease and when it
is for 999 years it is said to be perpetuity or for endless
duration.

• A leasehold property: The leaseholder is
known as lessee and holds the physical
possession(under) of the property for the
definite period under terms and condition
specified in the lease document.
• The different types of leases:
• Building lease
• Occupation lease
• Sub-lease
• Life lease
• Perpetual lease

• Building lease: freehold is want to give the
open plot for lease to some person lessee on
an agreement of premium or ground rent or a
combination of a both. The lease holder can
erect a building there up to a specified
amount in a specified period and he maintains
the property and earn through that property.
These types of leases are generally grand for a
long period of 50,99,999 years . At the
termination of the lease, the lessor becomes
the full owner of the land.

• Occupation lease:
• Sub lease:
• Life lease:
• Perpetual lease:

Valuation

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Valuation