Module 4 - Valuation

Valuation 2

Valuation is the art of assessing the present fair value of a property at a

stated time
Valuation is not an arbitrary Process
It is based on certain facts and formulae and only after a judicious
processing of such facts and indications, we can suggest the value or fair
price of the property.
Rises and falls of the fair prices can occur in a very short space of time.
It follows therefore that all valuations must clearly state the date to which
the valuation relates, since time is the essence of all valuations
 3

Cost – Constant Amount

Value – Depends on demand and supply
 Example 4

A person constructed an out house in a deserted place cost – Rs. 80,000/-. He wants
to sell it, but it is a place of less utility. So he will get max. Rs. 40,000/-. But at that
time a plan got sanctioned to develop a big industry adjoining to the area and
subsequent growth of population starts. Demand increased. He sells it at a price of
Rs. 1,25,000/-
Cost : Rs. 80,000/-
Value : Rs. 40,000/- to Rs. 1,25,000/-
 5
FACTORS AFFECTING VALUATION

The value of a property depends on its structure, life, maintenance,

location, bank interest, legal control, etc.
The value also depends on demand and the purpose for which the
valuation is required.
Rise in population
Abnormal conditions like riots
Rent restriction act
The purposes of valuation
6
The purposes are different and may differ according to the case
1. Purchase for investment or for occupation
2. Tax fixation
3. Sale
4. Rent Fixation
5. Insurance Premium
6. Compulsory Acquisition
7. Mortgage Value or Security of Loans
8. Betterment Charges
9. Wealth tax and estate duty
10. Gift tax
11. Probate – Court Stamp fee
12. Partition
Important terms used in Valuation 7
Scrap Value/ Junk Value/ Demolition Value

Scrap Value is the value of dismantled materials of a property at the end of its
utility period, and absolutely useless except for sale as scrap.
For a building, when the life is over, at the end of the utility period, the
dismantled materials as steel, bricks, timber, etc.. Will fetch a certain amount
Amount got by selling the useful material less the demolition cost of
building = Scrap Value
Usually considered as 10% of cost of construction
 8
SALVAGE VALUE

Estimated value of a built up property at the end of its useful life

without being dismantled.
Generally accounted by deducting the depreciation from its cost
Depreciation: Loss in the value of the property due to its use,life,
wear, tear, decay,etc
Market Value 9

The value at which it can be sold in the open market at a particular time.
Open market means the property is offered for sale by advertising in
daily News Papers and all necessary steps are adopted so that every
person who desires to purchase the same can make an offer.
Depends on forces of demand and supply, development of area , etc
Book Value 10

Value of the property shown in the account book in that particular year.
ie, original cost less the total depreciation till that year
Book value is considered for accounts book of a company
 SINKING FUND
11

Sinking Fund is an amount which has to be set aside at fixed intervals of time (Say
annually)
out of the gross income so that at the end of the useful life of the building or
property, the fund should accumulate to the initial cost of property.
A building, a machine, a vehicle, etc… becomes useless after certain years, ie…at
the end of its life. Hence it is necessary to make some provision where by the
owner can accumulated to a sum required for rebuilding/ replace.
For this purposes Sinking Fund is deposited ina bank to get highest compound
interest or sinking fund insurance policy is contracted with the insurance
company throughout the life of the building
 ANNUITY

● Annuity is the net instalment of annual or periodical payment for repayment

of the capital amount invested in a property for a specified period. Annuity
is either paid at the beginning or at the end of each period of instalment.
● Annuity Certain
● Perpetual Annuity
● Deferred Annuity
 ANNUITY PERTPETUAL DEFERED ANNUITY
CERTAIN ANNUITY
If an annuity is When the annuity is When the annuity
payable at the end receivable for an commences after a
of each period and indefinite period, it few years from the
payments are is known as actual date of the
continued for perpetual annuity capital investment it
certain fixed [Link] is known as
periods is known Deferred annuity
as annuity certain
Capitalised value = net income x
YP
YP = 100/ rate of interest
Outgoings in property valuation are the essential, recurring expenses incurred
by an owner to maintain rental income, such as taxes, repairs, insurance, and
management fees. Deducting these costs from the gross income determines
the net income.
Common Types of Outgoings
Net income=Gross income-Outgoings
● Municipal/Property Taxes: Levies imposed by local bodies.
● Repairs and Maintenance: Annual costs to maintain the building's functionality.
● Insurance Premium: Coverage against risks like fire or damage.
● Management and Collection Charges: Fees for managing the property and collecting
rent.
● Sinking Fund: A fund created for the future replacement of the structure.
● Loss of Rent: Potential income loss during vacancies or due to defaulting tenants.
A property fetches a net annual income of Rs 900 deducting all
[Link] out capitalised value of property if rate of
interest is 6% per annum

Ans.
Years purchase = 100/6 = 16.67
Capitalised value = net income x YP
= 900 x 16.67 = Rs 15,003
YEARLY INSTALMENT COEFFICIENT


(1+ )
● Yearly instalment coefficient = + =
 + =
(1+ ) −1 (1+ ) −1

= interest rate
n= no of instalment
A loan amount Rs 40 lakhs has been granted by life insurance corporation to a
municipality for implementation of a water supply scheme. The loan will be
repaid by way of annuity@8.5% interest per annum in 22 equal instalment from
the year of commissioning of the scheme. Find out the amount of annual
interest of repayment

(1+ )
● Yearly instalment coefficient
(1+ ) −1
= 22
0.085(1+0.085)
= 22 =
(1+0.085) −1
0.102
● Annual instalment of repayment = 0.102 x 4000000 = Rs.
408000
 DEPRECIATION
● It is the loss in the value of property due to its use, life, wear, tear, decay, etc
● Value of a building or property (but not land) decreases gradually up to the utility
period
due to depreciation

● Physical Depreciation :
● Wear and tear from operation, action of time and elements
● Machine parts – Car, Outer plastering of building peeling off
● Functional depreciation :
● Inadequacy – Determined by units of use of performance rather than age
● Contingent depreciation :
● Accidents (due to negligence, the elements and structural defect),
● Diseases (Parasites, pollution of water),
● Diminution of supply (natural gas, water, etc)
 OBSOLESCENCE

● Loss in the value of the property due to change in fashion, design in structure,
inadequacy to present or growing needs, necessity for replacement due to new
inventions, etc
● Internal Obsolescence :
● Poor ,odd or eccentric original design
● Change in type/ kind of construction
● Change in utility or demand
● External Obsolescence
● Poor original location
● Change in character of the district
● Specific influences such as due to construction of factories, stock yard, proximity of
public building, traffic location, noises, etc.
APPRECIATION
● Opposite of depreciation
● Increase in value over time due to demand, market value ,etc
 DETERMINATION OF DEPRECIATION
● Straight line Method
● Constant Percentage Method
● Sinking Fund Method
● Quantity Survey Method
Whatever method adopted, Book Value of the property at a particular time should be
original cost less all the depreciations till the time.
Like wise, Book Value at expiry of the use of property is Salvage Value,
if it is dismantled –Scrap Value
 1. STRAIGHT LINE METHOD
● Property is assumed to lose value by a constant amount every year, a
fixed amount of original cost is written off every year, so that at the end
of the term when the asset is worn out, only Scrap/ Salvage Value
remains.
● Annual Depreciation, D =
− 


● C – Original Cost
● Sc – Scrap / Salvage Value
● n – Life of property in
years
 2. CONSTANT % METHOD OR DECLINING
BALANCE METHOD

● Property is assumed to lose value annually at a constant percentage of its value

1/ 
●P=1−( / )
m
● Value of the property at m years = C (1- P)
● P - Percentage rate of annual depreciation for the constant % method expressed in
decimal
● C – Original Cost
● Sc – Scrap / Salvage Value
● The formula doesn’t hold good when Scrap / Salvage Value = zero
 3. SINKING FUND METHOD
● In this method the depreciation is assumed to be annual sinking fund plus
the interest of the accumulated Sinking Fund till that year
th
● Total Depreciation percentage % in that year (m year) =
●n
-Life
 4. QUANTITY SURVEY METHOD
● Property is studied in detail extend of physical deterioration worked out to
calculate
depreciation
● Property is studied in detail and loss in value is worked out.
● Each and every step is based on some logical ground, without any fixed
percentage of the cost of the property
● Q. The total cost of a new building is rs. 1, 50,000. Work out the
depreciated cost of the building after 20 years by straight line method
if the salvage value is Rs. 15,000 assuming the life of the Building is
80years
 Q. The total cost of a new building is Rs. 1, 50,000. Work out the depreciated cost of
the building after 20 years by straight line method if the salvage value is Rs. 15,000
assuming the life of the Building is 80years

● Annual depreciation = − = 150000−15000

=1687.52 Rs
80
● Depreciation for 20 years = 1687.50 x 20 = Rs. 33,750

● Depreciated cost of building after 20 years = 150000 – 33750 = Rs. 1,16,250

The present value of a machine is Rs. 20,000. Workout the depreciation
cost at the end of 5 years, if the salvage value is Rs. 2000. Assume life of
machine be16 years. Use constant % method.

1/ 
●P=1−( / )
1/16
= 1 − (2000/20000) = 1 − 0.8660 = 0.134

5 5
● Value of the property at the end of 5 years = C ( 1 - p) = 20000 ( 1-0.134)
= 9741.35 Rs
A pumping set with a motor has been installed in a building at a cost of Rs
[Link] life of pump as 15 years,work out amount of annual installment
of sinking fund required to be deposited to accumulate whole amount of 4%
compound interest

Ans.
Annual sinking fund, I = Si/((1+i)^n – 1)
= (2500 x 0.04)/((1+0.04)^15) - 1)
= Rs 125

The owner is to deposit Rs 125 annually in 4% compound interest

carrying investment for 15 years to accumulate Rs 2500
An old building has been purchased by a person at a cost of Rs 30,000 excluding
cost of land. Calculate amount of annual sinking fund at 4% interest assuming
future life of building as 20 years & scrap value of building as 10% of cost of
purchase
A person has purchased an old building at a cost Rs 90,000 on the
basis that cost of land is Rs 50,000 & cost of building is
Rs40,[Link] future life of building be 20 years, workout
amount of annual sinking fund at 4% interest when scrap value is
10% of cost of building.
● The cost of construction of a new building according to present market rate
is rs. 80,000/- having life of 70 years. But if the building is 15 years old,
determine the depreciation amount which should be deducted from the cost
of the new building @ 6% compound interest
 Q. The cost of construction of a new building according to present market rate is rs.
80,000/- having life of 70 years. But if the building is 15 years old, determine the
depreciation amount which should be deducted from the cost of the new building @ 6%
compound interest using sinking fund method
.

●Rate of depreciation in 15 (m) years =

= 0.02326 = 2.326%
● Total depreciation in 15 years on Rs. 80000 = 80000 x 0.02326 = Rs. 1860.80
METHODS OF VALUATION

1. Rental Method of Valuation

2. Direct comparison with the capital Value
3. Valuation based on profit
4. Valuation based on cost
5. Development Method of Valuation
6. Depreciation Method of Valuation
 1. Rental Method of Valuation

● In this method, the net income by way of rent is found out by deducting all
outgoing 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 Year’s Purchase gives the
capitalized value or valuation of the property. This method is applicable only when
the rent is known or probable rent is determined by enquiries
2. Direct comparison with the capital Value

● This method may be adopted when the rental value is not available from
the property concerned, but there are evidences of sale price of
properties as a whole. In such cases, the capitalized value of the property
is fixed by direct comparison with capitalized value of similar property in
the locality.
 3. 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 income is worked out after deducting gross income; all
possible working expense, outgoings, interest on the capital invested etc. The net
profit is multiplied by Year’s Purchase to get the capitalized value. In such cases,
the valuation may work out to be high in comparison with the cost of
construction.
 4. Valuation based on cost

● In this method, the actual cost incurred in constructing the building or in

possessing the property is taken as basis to determine the value of
property. In such cases, necessary depreciation should be allowed and the
points of obsolescence should also be considered
 5. Development Method of Valuation

● This method of Valuation is used for the properties which are in the
underdeveloped stage or partly developed and partly underdeveloped stage. If a
large place of land is required to be divided into plots after providing for roads,
parks etc, this method of valuation is to be adopted.
● In such cases, the probable selling price of the divided plots, the area required for
roads, parks etc and other expenditures for development should be known. If a
building is required to be renovated by making additional changes, alterations or
improvements, the development method of Valuation may be used
6. Depreciation Method of Valuation


Structures with
● P – Cost at present market rate
● 100 years life, rd= 1
● rd – fixed percentage of depreciation
● 75 years life,rd = 1.3

● 50 years life, rd =2.0

● 25 years life, rd = 4.0

● 20 years life, rd = 5.0

● A building is situated by the side of a main road of lucknow city on a land
2
of 500 m .The built up portion in 20 m x 15 m. The building is first class
type and provided with water supply, sanitary and electric fittings and the
age of the building is 30years. Work out the valuation of property.
2
Assuming the plinth area rate as rs. 200 per m . Assume cost of land as
2
rs. 60 per m
●
A building was purchased for Rs 15,00,000 in the year [Link] annual
depreciation,total depreciation & book value of building in the year 2009,if rate of
depreciation is 2%

Book value = c(1-p)^n = 1500000 x(1- 0.02)^4

= 1383552.4/-
Total depreciation = Original cost – Book value
= 15,00,000 – 1383552.24
= 116447.76/-
Annual depreciation = value of property in 2008 – of property in 2009
Value of property in 2008 = c(1-p)^n
= 15,00,000(1-.02)^3
= 1411788/-
Annual depreciation in 2009 = 1411788 – 1383552.24
= 28235.76/-
Fixation of rent

● Rent of building is fixed on basis of certain % of annual interest on capital and all
possible annual expenditures on outgoings
● Capital cost divided by Years purchase will give the return
● To this net return, all possible expenditures on outgoings are added to get gross annual
rent
Gross rent = Net rent + outgoings
● Dividing gross rent by 12, rent per month can be calculated.
● Rent worked out by this method is called standard rent, while actual rent may be higher or
lower than this depending on situation of property,type of construction,demand & supply
Freehold property

● It means the owner is in absolute possession of the property and the owner can
utilize the same in any manner he likes subject to the rules and regulations of the
Government and local [Link] may use the property by himself or may give it
for lease .
Leasehold property

● The owner of the freehold property may give his property for lease to any other
person. The property which is given on lease is called leasehold property. The
person who takes lease is called lessee or leaseholder and the owner who grants
lease is called lessor.
Types of lease
1.A building costing Rs 7,00,000 has been constructed on a freehold
land measuring 1000 sqm in a city. Prevailing rate of land in
neighbourhood is Rs 150 per sqm, Determine net rent of property if
expenditure on outgoing including sinking fund is Rs 24,000 per
[Link] out also gross rent of property per month. Owner expect
6% and 4% return on cost of construction & land respectively
 Cost of construction = 7,00,000
Ans.

Cost of land = 150 x 1000 = 1,50,000

Net rent = 0.06 x 700000 + 0.04 x 150000
= 48,000/-
Outgoin = 24,000/-
Gross rent = net rent + outgoings
= 48000 + 24000
= 72,000/-
Gross rent per month/
Standard rent = gross rent/12 = 72000/12 = Rs 6000/-
2. A person has purchased land costing 80000 & constructed a building there at a cost of
1,20,000/- including water supply, sanitary & electrical installation allowing a net return of
7% on cost of building & at 5% on cost of [Link] out standard rent of property with
following data
1. Sinking fund on 4% interest
2. Future life 75 years
3. Annual maintenance at 0.5% of cost of construction
4. Other outgoings at 28.5%
5. Scrap value = 10%
Cost of a building at present market rate is Rs 6,25,[Link] of
depreciation as 2%. Determine value of building after 10 years.
Built up area of a building on 450sqm land near a city is [Link] area rate is
Rs 2500/sqm including water supply,sanitary & electrification [Link] of
building may be taken as 20 [Link] of land is Rs 1200/[Link] of depreciation
is 2%.Calculate present vale of property.
A 2building is situated by the side of a main road of lucknow city on a land of 500
m .The built up portion

in 20 m x 15 m. The building is first class type and provided
with water supply, sanitary and electric fittings and the age of the building is
30years. Work
2
out the valuation of property. Assuming
2
the plinth area rate as rs.
200 per m . Assume cost of land as rs. 60 per m
2
●The total cost of land assuming Rs. 60 per m = 60 x 500 = Rs. 30,000
2
●Plinth area of building = 20 x 15 = 300 m
2
●Assuming the plinth area rate as Rs. 200 per m , including water supply, sanitary
and electric fittings, Cost of building = 300 x 200 = Rs. 60,000
●Considering the life of building as 100 years, the depreciated value of the
building,
● D = P = 60000
n = 30
rd = 1.0
● Total valuation of property = 44280 + 30000 = Rs. 74280
Fixation and Calculation of Rent of Government Building
 Method 1 – Overall percentage basis


● Annual rent is taken as 6% per annum of the total capital cost + Municipal and
all other taxes

● Capital Cost - Cost of building, Cost of sanitary and water supply works, cost of
electric installations, cost of construction of compound walls, fencing of gates,
cost of approach roads and other roads within the boundaries

● Cost of land is not included

 
Method 2 – Individual percentage basis

● Standard rent is calculated at 6 % interest on the capital cost and in addition the
expenditure on annual and special maintenance and repairs and municipal and other
taxes are added
● For annual repairs of building – 1.5 % of cost of building
- 1% of water supply works and sanitary works
- 1.5 % of the cost of electric installation

If sanitary and water supply works are given separately, then take 1 % each for repair
works
 

Method 3

1
● Rent = 10th of basic pay

● In addition he has to pay the electric bill, sweeping charges , etc

Chargeable monthly house rent of a government employee for a government

building shall be minimum amount from the above 3 methods
 
Q. Calculate the standard rent of a government residential building newly
constructed at the cost of Rs. 75000. Data given :

● Cost of Sanitary and water supply works = 10 % of building cost

● Cost of electric installation = 8% of building cost

● Cost of internal roads and compound wall = Rs. 10000

● Municipal and all other taxes = Rs. 300 per annum

 
Solution :
● To Calculate Capital Cost:

[Link] of building = Rs. 75000

[Link] of Sanitary and water supply = 10% building cost = Rs. 7500

[Link] of electric installation @ 8% of building cost = Rs. 6000

[Link] of internal roads and compound wall = Rs. 10000

●∑ = Rs.98500
 
Method 1 – Overall Percentage basis

● Municipal taxes per annum = Rs. 300

● Total = 5910 + 300 = Rs.6210
Method 2 – Individual percentage basis

=Rs.5910

= . 1275

Rs .75

= Rs. 90

4. Municipal and all other taxes = Rs . 300

∑ = Rs. 7650

As the basic pay is not given, method 3 is not applicable. The

chargeable rent is the minimum of the above two methods = Rs. 517.50
landed property

● landed property or landed estate is a property that generates income for the owner
without the owner having to do the actual work of the estate.
Valuation of landed properties

● BELTING METHOD
● DEVELOPMENT METHOD
● HYPOTHECATED BUILDING SCHEME METHOD.
 Hypothecated building scheme method.

● Hypothetical building scheme method is one such method which helps in solving
the problem when land sale data is not available but the valuer is able to get
reliable data for the prevailing rents in the colony or in similarly situated colonies.
The steps involved in this method are as enumerated below.

● Prepare a suitable building scheme for the plot of land in conformity with the
latest building bye-laws.
● Work out the cost of construction for the proposed building.
● Estimate the time required for construction of the building.
● Make necessary additions for the entrepreneur's effort and profit.
● Work out the present work of the cost of construction taking the period for the
expenditure to be the average point of the construction period as was done for
the development cost in the hypothetical development scheme.
● Work out the area that can be let out in the new building on its completion and then work out the income
that can be earned by letting the spaces in the new building.
● Work out the market value of the property on its completion by income capjtalisation method. i . . . ,
● Work out the present worth of the market value assessed in the previous step in the same manner as
was done for the land value in the hypothetical development scheme by deferring the amount at a
suitable rate of interest for the likely period of construction.
● Work out the market value of the land as the difference between the present worth of the income
capitalised value and the present worth of the expenditure.
● Add the scrap value of the structures.
Lease for life

● Not common
● Period of lease is fixed as remaining life span of lessee
Leasehold property

● Leasehold is the type of ownership wherein the flat/home

on the land is leased to the flat-owner for a certain tenor
(lease period), but ownership belongs to the original
owner/freeholder.
Freehold property

● Freehold refers to ownership of the property and land on

which the property has been built.