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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.
Years 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 years 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 1) The loss in the value of
the value of the property the property is due to
due to wear & tear, change of design,
decay ect. fashion, in structure of
2) Depreciation depends on the other, change of
its original condition, utility, demand.
quality of maintenance 2) obsolescence depends
and mode of use. on normal progress in the
3) this is variable according arts, inadequacy to
to the age of the present or growing needs
property. More the age, etc.
more will be the amount 3) this is not dependent on
for the depreciation. age of the building. A
4) there are different new building may suffer
methods by witch the in its usual rent due to
amount of depreciation obsolescence.
can be calculated. 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 @ % 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 years
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 / Years 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.
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
times that of front belt and the depth of the
third belt at 1 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 years
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
Occupation lease:
Sub lease:
Life lease:
Perpetual lease: