UNIT 6 VALUATION: THE BASIC

ELEMENTS
Structure
6.1 Introduction - -
Objectives
6.2 What is Valuation?
6.3 Market Value, Book Value, Salvage Value, Replacement Cost, Earning Value,
Potential Value, Written Down Value
6.4 Cost and Value
6.5 Valuation-Purpose
6.6 Valuation Under Direct Tax Laws
6.7 Valuation Cell-Set Up-Functions
6.8 Registered Valuers
6.9 Different Methods of Valuation
6.10 Land and Building Method
6.10.1 Land Tenwe - Freehold Land and Leasehold Land
6.10.2 Land Valuation
6.10.3 Replacement Cost of Building
6.10.4 Depreciation
6.10.5 Value as per Land and Building Method
6.11 A Typical Example for Valuation by Land and Building Method
6.12 Summary
6.13 Answers to SAQs

6.1 INTRODUCTION
Since times immemorial mankind has been indulging in valuation of things. In any trade, or
even in an ordinary purchase in the market, a person does a mental calculation of what the
worth of a thing is to him. Before the concept of money came, people used to value things
on barter basis. With the introduction of the concept of money, the value came to be related
to the worth in monetary terms.
The simplest definition assigned to the term value is the amount that a potential buyer
will pay for the possession of a thing desired. Correspondingly, it may also be termed as
the amount that a potential seller desires for parting with a thing. It is true that the
amount which a potential buyer may be willing to pay may be quite different from what a
seller wants for the same thing. But in that case the deal will not be struck and the value for
the buyer and the value for the seller will remain to be abstract figures, not of much use in
market application. The study of principles of valuation does not contemplate estimation of
such abstract figures. It basically contemplates development of expertise in determining the
value as that amount which is acceptable to both the buyer as well as the seller. It involves
an estimation of the figure on which the minds of the seller and the buyer meet.
Sometimes valuation may have to be done for determining special values to suit specific
requirements, such as valuation of assets as per prescribed rules in Wealth tax laws-but
even then it is not the intention to determine the value of the fantasies of individuals or the
values of the sentiments of the individuals attached to a property.
Though thaprinciple of future utility is subsumed, consciously or sub-consciously, in the
consideratio~sof any buyer about to strike a deal, this principle has more specific use in
determination of the value of immovable properties. For a fact, one of the definitions,
ascribed to the value in the context of immovable property valuation, is the present worth
of future rights in the property.
In the Indian context, the need for valuation of immovable properties arises in
implementation of several taxation laws in addition to the need felt in market transactions.
Valuation To be a successful valuer, the prerequisite is that one must either himself develop, or must
have a ready access to, a reliable data bank of prices that the actual sales of the properties
have fetched in and around the area of his operation. There is no substitute to this. The
principles of valuation can be learnt but the input parameters have to be based on factual
information. The more exhaustive the data bank, the more reliable and convincing will the
valuation be.
Objectives
1
After studying this unit you should be able to :
understand broad principles of valuation of immovable properties,
know the purpoies for which valuation of immovable properties is required to
be carried out,
comprehend the various terms used to assign specific meanings to value,
distinguish between value and cost,
understand the set up and functions of the official and the private valuation
I
machineries, and
understand the broad classification of the methods used in valuation of
immovable propeees.

6.2 WHAT IS VALUATION ? 1-

Valuation is the art of scientifically determining the price that a willing buyer would pay to
a willing seller for transfer of a thing. In the context of the immovable properties, it is the
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estimation of that price which the prospective purchaser will pay, and the prospective seller
will accept, for transfer of the immovable property.
An immovable property is, in effect, a bundle of rights in a landed property. It is possible
that in some cases, it may not be the intention to transfer all the rights in the landed
property. In that event the valuation will mean determination of the price of only those
rights as are intended to be transferred.
rn

6.3 MARKET VALUE, BOOK VALUE, SALVAGE VALUE,

REPLACEMENT COST, EARNING VALUE,
POTENTIAL VALUE, WRITTEN DOWN VALUE
Market Value
Market value of a property is the estimated price that in the opinion of the valuer a willing,
knowledgeable and prudent buyer would pay to a willing, knowledgeable and prudent seller
for transfer of the property on a particular date.

Book Value
t
In an immovable property the standing structures depreciate with time.'To the extent that
the depreciation occurs, the value of the property may be taken to go down. In an absolutely
stable economy where there is no inflation, the depreciation represents the wasting of a
portion of the original value. In account books an annual discount is allowed for the
reduction in the oiiginal cost of the assets to account for the physical depreciation. At any
stage, therefore, the value of the assets in the books of account is lower than the original
cost, unless revaluation of assets was done at any earlier stage. The value of the assets
shown in the books of account on any particular date is the Book value of the immovable
property.

Salvage Value
With physical depreciation setting in, a stage may come when the property is no more
habitable and needs to be demolished. Demolition may also be required when the structures
constructed over the land become obsolete or when the existing structures are proposed to
be demolished for more intensive utilisation of land underneath. In all these cases, the
salvaged after meeting with the cost of demolition and clearance of debris. When this is the Vatuptian:
The Basic Elements
state of affairs, the' value that the structure may command is known as Salvage value.
Replacement Cost
Replacement cost is the amount that will have to be spent if a property similar to the
property being valued, is created on the date of valuation. While assessing the replacement
cost, emphasis is to be laid on the assessment of cost for creating a property similar but not
necessarily absolutely identical property. The idea is that the wasteful expense need not
enter the calculations for construction of a similar property.

Earning Value
Earning value of the property is the amount that a property can fetch as regular periodical
income.
Potential Value
The existing structures on a piece of land may not have exploited the full potentiality of
land. For example, consider a piece of land in a prime commercial locality, capable of being
put to use as posh shops, which may presently have only an old residential single storied
structure. Or, take the case of a piece of land in an area where the revised bye laws have
permitted a higher density and as a consequence the said plot of land can be used for a
multi-storied construction, but currently it supports only load bearing structures of one or
two storeys height with or without provision for future vertical expansion. In all such cases
there is unutilised potential available in the land which can be exploited either by demolition
of the existing structures or by adding more constructions in the same premises. In such
cases the immovable property is said to possess a Potential value.
Written Down Value
Written Down Value is the value of property arrived at after accounting for the year to year
depreciation. When no revaluation of assets is done in any previous year, the Written Down
Value will be the same as the Book Value.

6.4 COST AND VALUE

Cost is past history. Value embraces future. Cost is the amount actually spent on creation of
the asset. It includes the purchase price of land and the amount spent on construction, if the
property is self constructed. If the property was purchased by the present owner in the same
shape as it is, then cost is the price that the present owner paid for its acquisition. If the
present owner made some improvements, then cost includes the amount spent on such
improvements. As against this, value is the present worth of the future enjoyment of the
property. The value is what a person is prepared to pay for possessing the property. The cost
thus is not the value. But cost, or a small variation of the same, may provide a means to
determine the value of the property. For example, replacement cost concept gives a most
commonly method of determining the value of the owner occupied properties.

SAQ 1
ij Explain what you mean by valuation of a property and how does it differ from
the cost?
ii) Explain what is Market Value and Book Value?

6.5 VALUATION-PURPOSE
Valuation of immovable properties may be required for various purposes. Some of the
purposes are :
for estimation of the price when the property is actually required to be sold,
for direct tax laws,
Valuation for municipal rating (again for taxation purposes),
for insurance, and
for mortgage.

6.6 VALUATION UNDER DIRECT TAX LAWS

In Indian laws, taxes are imposed on properties under various direct tax laws. In most of the
cases the quantum of tax is related to the market value of the property. In such cases the
concept of a notional market is created and the price that, in the judicious opinion of the
taxation authority, the property will fetch if sold in the market, is determined for
taxation purposes. The actual sale does not occur but still the property is considered to be
available for sale in a hypothetical market on the date named in the laws. Recently, the
Government has brought in the concept of a taxable value to replace the concept of market
value. In the latter case, rules have been prescribed for determination of the value for tax
purposes. Such a taxable value may have no relevance to the estimated market value of the
property.
The direct tax laws, which impose tax on properties on the concept of value (both market
value andlor taxable value) are :
Income Tax Act
Valuation of immovable properties is required under this act ;
i) for estimating capital gains on sale of the irmnovable property, both with
respect to the original acquisition price as well as the sale price,
ii) for considering the desirability of a premptive purchase when the property is
actually sold and it is felt that the declared price is not actually the price paid
for the transaction, and
iii) for estimating the cost of construction when the declared cost of construction
is doubted.
Wealth Tax Act
Valuation of properties is required under this act for estimating the value of the property as
the quantum of tax depends on the value of the property as on the last date of the financial
year.
Gift Tax Act
The valuation under this act is required for estimating the value of the gift as on the date of
gift.

6.7 VALUATION CELL-SET UP-FUNCTIONS

To help in the tax administration-so far as the taxation laws relate to taxation of immovable
properties-the Government ~reated,in 1972, a Valuation Cell under the Income tax
Department. This Cell is assigned the job of helping the Income tax Department in valuation
of immovable properties for the purposes of various direct taxation laws. The Cell works
under the charge of Chief Engineers, one located in Delhi and the other in Madras, who
provide the overall administrative control. They are also known as Regional Valuation
Officers. The actual valuation work is done by the lower level functionaries, namely,
Superintending Engineers (designated as District Valuation Officers), Executive Engineers
(designated as Valuation Officers) and Assistant Engineers (designated as Assistant
Valuation Officers). Their jurisdiction depends, apart from geographical jurisdiction, on the
monetary value declared by the con erned owners in their tax returns.
t I

To curb the large scale understatement of sale price of immovable properties in the
registration documents, the Government, in 1987, also created special cells, termed as
Appropriate Authorities, in the Income tax Department. Each such cell consists of two
Commissioners of Income tax and one Chief Engineer and necessary supporting staff.
These cells are called upon to examine all cases of intended transfer of immovable
properties where the declared sale price is more than rupees ten lakhs. The parties intending
to transfer such properties are obliged to enter into an agreement of sale in the first instance Valuation:
The Basic Elements
and supply the same to the concerned Appropriate Authority along with all necessary details
of the property. In cases where, after a proper valuation is conducted, it appears that the
correct sale price is not declared, the concerned Appropriate Authority can stop the
transaction and order that the property intended to be transacted between the two parties be
sold to the Government at the price which the parties had declared in their documents. The
properties so purchased are then sold by the Government through public auctions. The
intention of this exercise is to curb the tendency of passing of black illorley in such
transactions.

6.8 REGISTERED VALUERS

While the official valuation cell looks after the work of valuation of immovable properties
for the Government, there is also a system of registered private valuers who are recognised
as experts in valuation for assisting the public at large. These registered valuers not only
prepare valuation reports, but are also authorised to appear before the taxation authorities on
behalf of the owners. Any person possessing the following qualifications can apply to the
concerned Chief Commissioner of Income tax for the purposes of getting himself registered
as a registered valuer for valuation of immovable properties.
i) He must either be a graduate in civil engineering, architecture or town planning of a
recognised university, or, must possess a qualification recognised by the Government as
equivalent ; and
ii) He must be a person formerly employed :
a) in a post under Government as a gazetted officer, or
b) in a post under any other employer carrying a remuneration of not less than
Rs 2000.00 and must have retired or resigned after rendering at least 2 years'
service as a valuer, architect, town planner or in the field of construction of
buildings, design of structures or development of land.
c) as a professor, reader or a lecturer for a degree in civil engineering,
architecture or town planning and must have retired or resigned after teaching
any of the subjects of valuation, quantity surveying, building construction,
architecture or town planning, for at least 2 years.

He must have been in practice as a consulting engineer, surveyoror architect for not less
than 2 years, and must have acquired sufficient experience in any of the following fields.
a) valuation of buildings and urban lands,
b) quantity surveying in building construction,
c) architectural or structural designing of buildings or town planning, or
d) construction of buildings or development of land.

I) Wh\ necessary for the Govcmnirnl to create 1 aluat~oncell under

B 3s i t ---. ,
Incornc-(nudepartmcr~t'
I ) Who can be a registered valuer''

6.9 DIFFERENT METHODS OF VALUATION

The methods of valuation may be broadly classified as follows :
a)
b)
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Comparative Sales method.
Land and Building method.
c) Income Capitalisation method.
Valuation d) Profit Capitalisation method.
e) Hypothetical Development Scheme and Hypothetical Building Scheme
methods.
(The sale price of the property-if the sale has occurred on a date proximate to the date on
which the valuation is required, and if the sale price data is authentic and reliable-will itself
give the market value of the property. This would, thus, give an excellent method for correct
valuation of an immovable property. However, it is rare that such an event occurs and is
also reliable, and yet, an independent valuation is required. That is why, though in theory
the sale price method could be considered as a yet another method for valuation, yet in
actual practice this hardly has any practical significance.)
In general any method, theoretically at least, should give same, or at least more or less same,
value. However, it is invariably either not possible or not practical to adopt all methods in
all situations. The success of any method in giving a reasonably correct assessment of value
depends on the availability and reliability of basic input parameters required in adoption of
the chosen method. Moreover, the properties are invariably fraught with some or the other
encumbrances. Some of the methods may not give the facility of conveniently
accounting for such encumbrances. For example, when a property is tenanted, and the
tenants are protected against eviction and against enhancement of rents, the Land and
Building method does not provide any ready means for accounting for reduction in value of
the property in the hands of the landlord due to the encumbrances of such a tenancy. Also,
methods of Hypothetical Development Scheme and Hypotheticpl Building Scheme are
rather sensitive to variation in basic assumptions and can, at best, be used with caution. And
that too if no other method is conveniently applicable.
a) Comparative Sales Method 1-
Comparative Sales method is the ideal method for valuation if reliable data of comparative
sales is available. However, it is rare that one comes across the sale instance of a
comparable built up property sold on the date-or even near about the date-on which the
value of a property is to be determined. It is, however, usually possible to get reasonably
reliable data for comparable plots of land. The method is as such the most reliable method
for determining the value of land. Even while adopting this method for valuation of land, it
is usually necessary to make adjustments for the differences between the subject property
and the chosen comparable sale(s). We will discuss the question of such adjustments later in
th1s unit.
b) Land and Building Method
Land and Building method contemplates determination of the value of land separately, and
I;
then adding to it, the value of the structures. The philosophy governing this method is that
any prudent buyer may be prepared to pay, and any prudent seller may be prepared to take,
that amount as the price of the property, as would be required to build another property
which is similar in all respects to the subject property. This method is found to be useful in
all normal property valuation cases where there are no apparent restrictions on full
enjoyment of the property by the buyer. The method presupposes that the property is to be
passed on in vacant state, or at least, the tenants do not have statutory protection and can be
evicted at will. It also presupposes that it is possible to build another property with sirnilar
facilities and in similar locality.
c) Income Capitalisation Method
Income Capitalisation method is recognised to be the most appropriate method for
I
determining the value of a property which is tenanted and where the tenants enjoy
protection under rent control laws against eviction and against enhancement of rents. In
such cases the property value virtually gets divided into two parts. One part pertaining to the
right of occupation in the hands of the tenant is usually not a legally saleable commodity.
The other part relating to the ownership of an encumbered property, including the right to
receive rents, remains with the landlord. It is the latter part which is usually requited to be
valued. And since this part predominantly relates to the right to receive rent, the most
favoured method is the income capitalisation method.
d) Profit Capitalisation Method
Profit Capitalisation method is also a slightly modified form of the Income capitalisation
I*
method with a little variation. This method is invariably applied to commercial-usually
single use-properties used in business ventures. A cinema house, or a hotel, run as a Valuation:
The Basic Elements
business venture by the owner, generates profit for the owner due to the very nature of the
property. It is considered that the property plays a predominant role in generation of profit
in such cases. Many valuers, therefore, use this method for determining the values of such
properties by substituting profit (after making reasonable reduction to account for the
entrepreneur's effort) in place of income in the Income Capitalisation method. The method
is found to be quite useful in cases where the comparative land rates data is not available.
e) Hypothetical Development Scheme and Hypothetical Building Scheme Methods
Hypothetical Development Scheme and Hypothetical Building Scheme methods are evolved
from a combination of the Land and Building method and the Income Capitalisation
method. These methods ate used when no reliable data for land rates for comparable
instances is available but the data for prevalent rates of small plots of land, or for rents
receivable in the locality can be obtained. The methods may be applied, albeit with caution,
when a development scheme or a building scheme is feasible according to the prevailing
bye-laws andlor demand.

6.10 LAND AND BUILDING METHOD

In the land and building method of valuation, the land component and the building
component are valued separately and added together to getfie value of the immovable
property.
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6.10.1 Land Tenure Freehold Land and Leasehold Land
The land holding may, broadly, be divided in two categories, namely,
i) Freehold
ii) Leasehold
In freehold land holding, the property owner is the absolute owner of the land and is not
answerable to anyone else for its enjoyment for legally permissible uses. The owner usually
enjoys unfettered rights in the land within the overall purview of the bye-laws applicable to
the area.
In leasehold land holding, two or more parties may be sharing different rights in the land.
For example, when a person possessing free hold land lets it out to another person on some
agreed terms and conditions, the person taking such land on such terms and conditions is
said to be holding the land on leasehold basis. The lease terms may put several restrictions
on the use of land and may also stipulate payment of a periodical rent to the owner. The
restrictions may even prohibit a person from using the land for some purposes even though
those purposes may be permissible as per the bye-laws applicable. The lease terms may also
include provision for dispossession in certain circumstances.
6.10.2 Land Valuation
Land constitutes an important component of value of an immovable property. In fact the
land value, particularly in low rise structures in modem day urban areas, may tum out to be
even more than 50% of the total value of an immovable property. Several factors may
influence the value of land in an immovable property. Some of these are :
i) Use to which the plot of land can be put as per the local bye-laws.
ii) Shape, size, location etc. of the plot.
iii) Social status of the colony in which the plot of land is located.
iv) Accessibility and proximity to the public transport system and other amenities.
v) Effect of local bye-laws and regulations.
vi) Demand for land.
vii) Nature of holding, namely leasehold or freehold.
viii) Terms and conditions of lease in leasehold holdings.
ix) Restrictions, if any, on sale.
The factors mentioned above are illustrative and not exhaustive. There can be many more
factors which affect the value of land. The effect that such factors produce on the value may
also widely vary. Even the same factor may increase the value in one case but may decrease
the value in another case. For example, proximity to a railway station or a bus stop may
increase the value in a middle class locality but may be considered to be a nuisance in a
posh locality where all residents move about in their own vehicles. The assessment of the
effect of such factors is, therefore, necessarily a subjective matter. The correct assessment
of the effect of these factors depends largely on the intelligence, common sense and the
analytical approach of the valuer. For making a reasonable assessment of such factors, a
valuer has to learn to understand the social values of the society with regard to advantages
and the disadvantages in an immovable property. For assessing the effect of certain terms
and conditions of the lease in a case of leasehold land, however, it may be possible to work
out the effect through some mathematical calculations.
A vacant buildable land usually commands a higher value than a similar land which has
already been built upon. This is due to the flexibility of design available in vacant land. The
prospective buyer is not restricted in his fancies by the existing foundations or the existing
structures. A vacant land is valued for its most advantageous and optimum use.
The value of land is invariably assessed by following the comparative sales method. A data
bank of actual sales is made wherein the price that the sale of land parcels have fetched is
recorded along with the main features of the sale as well as the physical characteristics of
the property. The sale instance or sale instances considered to be as near in advantages and
disadvantages to the property to be valued, idare selected from the data bank. Taking the
unit rate fetched in those sale instances, adjustments are made for escalation due to time gap
between the date on which the sale of the sale instance property occurred and the date on
which the valuation of the subject property is required. Adjustment is also made for
difference in other characteristics between the sale instance property and the subject
property. With the unit rate so modified, the value of the subject land is assessed.
The land value may, in exceptional circumstances, be assessed by hypothetical development
method or by hypothetical building scheme. These methods are described in Unit 7.
6.10.3 Replacement Cost of Building
The valuation of building involves assessment of the replacement cost of the structures and
then discounting the same to allow for the depreciation due to age of the building.
Replacement cost may be assessed by any of the recognised principles of quantity
surveying. Usually the following two methods are used.
i) Preliminary estimate on the basis of standard plinth area rates and the cost
index.
ii) Detailed estimates on the basis of standard schedule of rates and the market
rates.
Normally, the replacement cost is assessed on the basis of the standard plinth area rates and
the cost index for the purposes of valuation of immovable properties. However, if adequate
details are available, and if more accuracy is required, the second method of preparing
detailed estimates may be adopted.
The basic aim is to estimate the cost of construction of the structure as on the date of
valuation. In working out the replacement cost, it has to be ensured that the cost is assessed
for a slructure of similar utility and not necessarily identical structure. Wasteful expenditure
in the existing structure, which may not be of any use in the modem day social values, has
to be ignored. On the same account, no discounting may be made for any extraordinary
economic efficiency if that is not a normal feature in modem day construction practices. An
inefficient design, not only reduces the utility of the structures but may also prove to be a
depressing factor on the value of land. This has to be kept in view while awessing the
replacement cost for the purposes of valuation.
In working out the replacement cost of the structures, the period required for construction is
not taken into consideration. For example, when the replacement cost is worked out on the
basis of plinth area rates and the cost index, the cost index as worked out on the basis of
interpolation for the date of valuation only is adopted in calculations.
6.10.4 Depreciation Valuation:
The Basic Elements
The replacement cost gives the amount which will be required for construction of a building
of similar utility. This, however, does not give the replacement value. The buildings
depreciate as they become older. In order to give a correct assessment of the value of the
structures, it is necessary to work out the depreciation that has set in due to the age of the
building. The value of the building portion of the property would only be known when the
discounting is done for depreciation from the replacement cost of the structures.
There are several methods available for working out the depreciation in the buildings. By
far the following three methods are commonly used by the valuers.
i) Straight line method,
ii) Sinking fund method, and
iii) Reducing balance method.
i) Straight Line Method
In this method it is assumed that the depreciation follows a straight line as the age of the
building advances. Let us, for example, assume that the assessed life of a building is 60
years. Let us also assume that the building is already 20 years old. Now, if we assume that
the salvage value of the building is 10 per cent of its replacement cost, then the remaining
90 per cent of the replacement cost will depreciate in 60 years. And since the building is
already 20 years old, the depreciation that has already set in is 90 x 20160 that is 30 per cent
of the replacement cost.
ii) Sinking Fund Method
In this method, it is assumed that a prudent owner would like to keep apart a small sum
every year in a safe security so that at the end of the life of the building the fund grows
enough to provide the means for rebuilding the structures. The depreciation at any
intermediate stage is the amount collected in the security upto the date of valuation. In
practice, however, the depreciation is accounted for by assessing the amount required every
year for recapturing the depreciated value by the end of the life of the building. The details
of this method will further be discussed in Unit 7.
iii) Reducing Balance Method
In this method it is assumed that the depreciation does not follow a straight line path during
the life of the structure. The method assumes that the depreciation is faster in the new
constructionsthan in the old constructions. Accordingly, it is assumed that the depreciation
occurs at a fixed percentage of the written down value of the structure. Thus, if the annual
depreciation percentage is assumed at 3.5%, then the depreciation in the first year of life is
3.5% but in the second year it becomes 3.5% of the balance value, that is, 3.5% of 96.5%.
The depreciation in the second year then is 3.3775% of the total value and so on. Taking the
earlier example of a 20 year old structure, the depreciation by this method, and on the
assumption of 3.5% annual depreciation, comes to 50.96 per cent, though ultimately after 60
years, the balance left in this case will also be only 11.a%, that is almost the salvage value
only.
The straight line method gives a uniform rate of depreciation during the life of the structure.
The sinking fund method gives a slower depreciation in the early years of the life of the
structure. As against this the reducing balance method gives a faster rate of depreciation in
the early years of life of structure. The sinking fund method is more of an accounts method
of assessing depreciation. This method is used in the Income Capitalisation method of
valuation. By and large, the valuers prefer to use straight line method for working out
depreciation in Land and Building method of valuation due to its simplicity and
reasonableness.
6.10.5 Value as per Land and Building Method
Having worked out the value of land, replacement cost of the structures and the
depreciation,value is estimated by simple addition of replacement cost as reduced by the
assessed depreciation to the land value to get the assessed market value of the immovable
property. Invariably the land value in a built up property is reduced by 5 to 10% to account
for the encumbrance due to existing buil@ng. Particularly so if the optimum utilisation of
the l a d becomes difficult due to the existence of the old structures. It may sometimes so
happen that the existing structures may prove to be a major hindrance in full development of
Valuation the potential of land. Take for example, the case of old single-storeyed buildings on large
plots of land in metropolitan towns. With the pressure on land increasing most of such old
buildings are demolished to make way for multi-storeyed buildings. In such cases it is not
possible to retain the old structures even if they have not yet lived their full life as the old
foundations and the structural elements will not be capable of taking the load of upper
storeys. In such cases the structure is more of an encumbrance on the value of land rather
than providing an additive element. Even a reduction of 10% in the value of the land may
not justify retention of the old building. h such cases the value of the property should be
worked out by taking full value of land and adding to it merely the salvage value of the
structures.
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SAQ 3
i) Explain in detail what are different methods of valuation of pmpertles?
ii) Which valuation method you would adopt m valulng a tenanted old ~ I C F ~ Zrt)
:.,
but which has substantial surplus developable land appurenan~'?
iii) What are different methods of cdculaang depreciau~n?Expla~tib m m g tcntl
method.

6.11 A TYPICAL EXAMPLE FOR VALUATION BY LAND

AND BUILDING METHOD
Let us now take a typical example for working out the value by Land and Building method.

Problem
The problem is that the market value is to be assessed for the property at plot No. 7 in ABC
colony. The relevant details of the property ace as follows:
Plot No. for which the valuation is required :7
Date for which the market value is required : 31.03.92
Date of completion of existing construction : 20,03.80
Area of the plot : 200 sq. mt
Whether land is freehold or leasehold : Freehold
Ground coverage permitted as per building bye-laws
Plots upto 200 sq. metre size : 60%
Above 200 sq. metre but upto 300 sq.m. size . : 50%
Above 300 sq. metre but upto 600 sq.m. size : 40%
User permitted as per local bye-laws : Residential
No. of storeys permitted :3
No. of storeys already constructed : 1
Whether provision exists in the foundations to build
two more storeys in future : Yes
Sale data available :Freehold plot No. 40, admeasuring 250 square metres and
located in the same colony, was sold on 31.03.91 for Rs.5,00,000. The plot, at the
time of sale, was a vacant plot with no construction thereon.
General specifications :The specifications followed are as followed in typical
higher class government quarters, namely, load bearing wall type construction on
spread footings with second class teak wood shutters, RCC slabs, Mud phuska
terracing, cement plaster with cement mortar 1 : 6 etc. However, mosaic floors are
provided in bedrooms also and all walls of drawing 1dining rooms are finished with
plastic emulsion paint.
Note :The analysis of the other sale data shows that the rise in prices of plots of land in and Vdoation:
The Basic Elemeats
around this colony has been of the order of 10%per annum during the last few years.
The plan of the single-storeyed building as constructed on plot No. 7 is given in Figure 6.1.

I
Open C o u r t
I

short

Stars
Opm C w r t

The location of this plot and plot No. 40 is indicated in the layout plan of the colony given
in Figure 6.2. This building was constructed during 1980 and was physically completed in

s;zo 10n X 20n MAIN ROAD

n
a
0
w

FSgure 6.2 :Layout Plan of ABC Colony

March 1981. The specifications adopted consist of load bearing wall type construction
conforming to higher type Government quarters in general, except that the entire flooring is
in cast in-situ mosaic in white cement. Provision is made in the foundations for taking the
load of two more storeys in future. The cost index in March, 1992 may be taken to be 664
with the base 100 on 1.10.76 when the standard 1.10.76plinth area rates of CPWD came
into force.
The property is located in a medium class residential locality in an urban conglomeration.
The location of the plot within the colony is as shown in the site plan.
Valuation of Land
The sale instance is available for the same colony. This is considered as most appropriate
comparative sale. As per this sale instance, vacant plot bearing number 40 was sold, one
year prior to the date on which the market value of the subject property is required, for an
amount of Rs. 5,00,000.00. The area of plot No. 40 is 250 square metres and hence the rate
per square metre works out to Rs. 2,000.00. This rate, however, needs to be suitably
Valuation modified to account for the difference in the characteristicslfeatures of the two properties.
These differences and the corresponding adjustments are explained below.
Difference due to time gap : There is a time gap of one year between the date of sale of the
sale instance property and the date on which the market value of the subject property is
required. In order to account for the general escalation in land values, the land rate derived
from the sale instance needs to be increased by 10 % to account for the time gap from
31.03.91 to 31.03.92.
Accordingly the adjusted rate will be 2,000 x 1.1 = 2,200.
Number of open sides : The subject plot is comer plot (two sides open) whereas the sale
instance plot is open only on one side, being surrounded by other properties on the
remaining three sides.
Adjustment Proposed +5%
Locational advantage of a public park in front : The subject property is facing an open
park whereas the sale instance property does not have any such large open spaces in front.
Adjus trnent Proposed +5 %
Difference in permissible ground coverage :More ground coverage is permitted in the
subject plot as compared to the sale instance plot. The land in urban areas commands value
because it has the capacity to hold buildings. If the buildings were not permitted on any
piece of urban land, it would command hardly any value. Even as agricultural land, the land
value would be only a small fraction of what the value would be if building construction is
permitted. Higher permissible ground coverage imparts a higher value to the land. Of
course, it can also be argued that higher ground coverage would leave less open areas and
would, therefore, affect the environmental openness. This may reduce the value to some
extent. But still, the increase in land value due to more intensive construction permitted will
be far more than the reduction due to reduction in environmental openness.
Adjustment may be worked out :
Add for higher coverage permissible = (60- 50) 150 20 %
Deduct for reduction in enjoyment of open space say 5 %
Net adjustment proposed + 15 %
Nearness to the commercial area :The subject property is quite close to the main road and
the commercial area. This imparts an advantage lo the subject property as such properties
are sometimes used, unauthorisedly though, for commercial purposes. And in modem urban
areas, commercial plots fetch more price as compared to purely residential plots. It is,
however, sometimes argued that such properties also suffer from the noise pollution and
traffic congestion. This aspect has to be carefully exarninedpn site. For our example, if we
assume that the tendency for commercialisation has de facto not yet developed on this side
of the main road, we may assume that the advantages of closeness to the commercial area
are offset by the factors of noise pollution and traffic congestion. On this assumption, no
adjustment needs be made for this factor.
Adjustment Proposed 0%

Constraint of design choice :The plot is already built upon. This reduces the choice in
design of the building particularly so since the design does not afford very good ventilation
in at least one bed room. Also the drawingldining room of a more or less square shape may
not be to the liking of many. On the other hand the sale instance plot is a vacant plot which
gives a free choice to the purchaser in the matter of design and construction. A prospective
buyer would like to discount the value on this account.
Adjustment Proposed -10%
Total adjustment required +15%
Reasonable rate for land therefore comes to 2,200 x 1.15 = 2,530
Rs. 2,530.00 per m2
Market Value of land 200 x 2,530
= Rs. 5,06,000.00
Replacement Cost of Building Valuation:
The Basic Elements
The replacement cost of the building may be worked out on the basis of standard CPWD
plinth area rates 1.10.76, which are also incorporated in the Central Board of Direct Taxes
circular, with suitable cost index. The cost on this basis may be worked out as in Table 6.1.

Table 6.1: Replacement Cost of Building

Item Quantity Rateper Amount Remarks

m
Load bearing construction with floor PAR 1976 Item No. 2.2.1
ht. 2.9 metres ( 9 " d " ) single storeyed. (for type Eqrts.)
Extra for making stronger foundations PAR 1976 Item No. 2.5.4
to take the load of two additional
storeys
Extra for termite proof treatment PAR 1976 Item No. 2.5.1 1
(ground floor area only)
Extra for mosaic flooring in bed rooms DSR 1989 Item No.
instead of cement flooring 11.16.6-11.4.2
32.95Add 57.72 % for
difference in DSR rates
and rates in 19.02-
March, 1982 5 1.97
Extra for plastic emulsion paint instead DSR 1989 Item No.
of dry distemper in Drg.Rm. 13.92.1 - 13.75 5.55
(on 36.8 m x 2.8 m area) Add 57.72 % for
difference in DSR
rates and rates in 4 a
March, 1982 9.55
Services :

Internal water supply and sanitary 6,000 each

installation
Internal electrical installation 5,700 each
External service connections 1 390001- 1 5% I 1,95&00 3.21
Compound wall 2.1 metre height 36 m 101.52 mt. 3,655.00 Analysed rate
63,s 17.00
Add at 564 % to account for current cost index of 644 on all items 3,39,895.00
-
except items 4 & 5 i.e. on 63,517 3,252
= Rs. 60,265.00
4,03,412.00 Say Rs. 4,03,400.00

Depreciation .
The structural specifications are similar to the specifications followed in a typical load
bearing wall type construction. The economic life of such a building may be taken to be
about 60 years. The building is already 12 years old as on the date of valuation. Further,
assuming that the salvage value of the building, when it has outlived its economic life, is
10 %,

Depreciation as on 31.03.92 = 12 x ( loo- lo ) x 4,03,400 = 72,612

60 100
'Therefore, value of the building = 4,03,400 - 72,612 = 3,30,788 or say Rs. 3,31,000.00
Adding this to the value of land worked out earlier,
Market value of the property = 5,06,000 + 3,31,000 = Rs. 8,37,000.00

6.12 SUMMARY
In this unit we started giving precise meaning to the term "Value". The requirements of
various laws specially of income tax was also seen. Various types of values which can be
attached to the subject property such as market value, book value etc. have also been
explained in depth. It has also been clarified as to what is the difference between cost and
value.
The special valuation cell set up under income tax department and registered valuers set up
has been explained. You have also learnt various methods of valuation such as comparative
sales method, land & building cost method. You have been indication as to which method of
valuation is appropriate for a particular situation.

6.13 ANSWERS TO SAOs

Check answers of all SAQs with respective preceding text.