1 - Introduction To Valuation

Session 1.
Introduction to Valuation
P B29: Valuation of Properties
NICMAR Pune | AY 2020-21
Prof. Shruti Vaishampayan, Architect – Urban Planner
Session 1. Introduction to Valuation
Valuation Practice in India
Prof. Shruti Vaishampayan 8/11/2020

• A registered valuer means a person registered with the
Authority in accordance with the Companies (Registered
Valuers and Valuation) Rules, 2017.
• Insolvency and Bankruptcy Board of India (IBBI) has been

specified as the Authority
• Registered valuers are registered for three asset classes:

(i) Land and Building;
(ii) Plant and Machinery and
2
(iii) Securities and Financial Assets.
Valuation Practice in India

• An individual is eligible to be a registered valuer, if he
i. is a fit and proper person,
ii. has the necessary qualification and experience,
iii. is a valuer member of a Registered Valuer Organisation
(RVO)
iv. has completed a recognised educational course as
member of a RVO, and
v. has passed the valuation examination conducted by
the IBBI, and
vi. is recommended by the RVO for registration as a
valuer. 3

Property Valuation

• What’s the value of any commodity? We always
question. Property valuer’s task is same as that of valuers
of other commodities – to estimate price.
• Unlike the case of several of goods (or, commodities)

whose market value/price is directly observable, it is
difficult to obtain that of real property because of their
peculiar characteristics:
• Durability of the asset

• Immovability/Non-transferability (Physical)
• Fixity of supply 4

Importance of Valuer’s Advice

• However, the above characteristics do not pose problem
to fix a value; rather it requires a systematic approach
towards assessment of value (called as appraisal).

Importance of Valuer’s Advice

• Given the difficulty of obtaining the market value of a
specific property, Valuer’s advice is needed for the
following reasons:
1. Special knowledge of various property characteristics

2. Imperfection of property market
3. Heterogeneity of real property
4. Microeconomic and financial aspects
5. Knowledge of legislation

Property Market Aspects

• Various property markets operate side by side.
1. Personal Market: community – a person’s preferences
(home buyers)
2. National Market: Large institutional investors – work

for financial gains. Indifferent about community and
locate at best suitable locations (E.g. mall chains, hotel
chains, banks)
3. International Market: Global investments in world

cities such as Dubai, London, Tokyo etc. Investors 7
compete for space in CBDs.

What is the “Commodity” in Real Property Markets?
• When one buys land and buildings, it is the ‘change of

hands’.
• Goods purchased in property market are various ‘rights’.
• Thus “Bundle of Rights” is the commodity in property

markets. E.g. occupational rights of a monthly tenant by
statute against eviction, OR Leasehold rights of 30 years
with or without restriction to sublet. Both are different in
value! 8


• Valuation is thus the process of recognizing the bundle of
rights and their variations that are marketed.
Abstract (Rights) + Physical Entity (Land and Buildings) =

Proprietary Unit for valuation purposes
• What is being transferred is the bundle of rights.

Value and Valuation

• Hypothetically, if land is free and capital not applicable, then
the only scarce input is labour. Thus more labour, more the
power to exchange. Barter System in old times, where 1 bear
(6 hrs labour) can be exchanged for 2 deers (2 hrs labour /
deer)! In Barter, it is about how much a commodity is worth
with respect to any other commodity.
• Today’s world: Product is a result of 3 inputs = Land, Labour

and Capital; Medium of exchange = money
Subjective value of a seller = Production cost + normal profit;

Different from market value of the product. 10

Value and Valuation

• Value may be defined as “Amount of money people are able
and willing to pay for the commodity in question at some
point of time.”
• Value of a commodity is not objective or intrinsic. E.g. Value

of land increases with provision of access road even if owner
has not incurred the cost.
• E.g. If a builder buys cheaper land in distress sale and

develops it, he may still sell at market value even though
production cost is less for him. Also vice-versa, if land is
bought at high price, then also market value will not change
and he may incur loss.
• Value of a commodity is determined by buyers. 11

Value and Valuation

• Value of the same property may be different for different
persons. (E.g. Sentimental value)
• Valuer has to consider circumstances that may increase

or decrease the value.
• Valuation can be defined as “carefully considered

estimate of the worth of landed property”.
12

Value and Valuation

• Valuers consider ability and willingness of buyer from
past transactions by examining subject matter of
valuation (property in question), macro-economic
conditions and other circumstances of the person paying
for it.
• Valuers draw comparison of the property and overall

circumstances to ascribe a value at a point of time to any
property.
13

Factors Affecting Valuation

• As the value of a property is
determined by the market for the Factors affecting
same, it is the demand and Value
supply forces that fix the price
and value.
Demand side
• Factors governing the supply and Factors
demand of the property,
therefore, also determine the
fluctuations in the value of Supply side
property. Factors 14

Demand Side Factors

1. Movement in Population – Increase in population
increases demand for real property. E.g. Pune City’s
ever growing population
2. Economic Activity – Increase in economic activity such

as industrial growth increases demand of real property
for other purposes, e.g. Hinjewadi and surroundings in
Pune
3. Improved Accessibility – Increase in demand due to

setting up new transportation facilities, e.g. new areas 15
benefit from metro rail connectivity/ BRTS
Demand Side Factors

4. Inflation – Land is not only a factor of production but
also storing wealth. Real estate shows steady
appreciation in value. Land is thus ideal for investment
in times of inflation.
5. Change in Taste and Social Circumstances – E.g.

Increased demand for small family units in urban areas
give rise to large scale development of small flats for
upper middle class.
Note- None of these factors are intrinsic. 16

Supply Side Factors

1. Short Term Fixity of Supply: In the short run, property
supply can not be increased.
2. Long Term Elasticity: Even in the long run, there is a

limit to increase of supply.
3. Irreversibility: Once property is constructed and if

there is no demand, supply can not be reduced.
4. Linkages with Finance Markets: Supply is dependent

on availability of finance for property development. 17

Supply Side Factors

5. Unfavourable legislation, such as Rent Control Act will
prevent funds from development of rental
accommodations.
6. Planning decisions such as Development Plan, Zoning,

DCR may artificially control supply of land. (Although
required for provision of public utilities)
Thus, Supply of landed properties is highly inelastic i.e.

Change in Demand has little effect on Change in Supply.
18

Market

• Demanders or buyers, and suppliers or sellers are two
sides of the market.
• “Market in economic terms means any arrangement by

which buyers and sellers are made to interact with one
another to form a price at which the goods can be
exchanged.”
• Demand and Supply are basic tools for studying an

economic market.
19

Demand

Sr No Price (Rs. Per Quantity
kg) Demanded
(Thousand kgs/
month)
1 25 20
2 20 25
3 15 32
4 10 42
5 5 55
• As price goes up, quantity demanded goes down. When price

goes down, quantities go up.
20
• Demand curve goes downward from left to right.
Supply

Sr No Price Quantity
(Rs. Per kg) Supplied
(Thousand kgs/
month)
1 25 42
2 20 38
3 15 32
4 10 22
5 5 0
• As prices go down, the suppliers are less and less inclined to

supply a commodity.
21
• Supply curve moves upward from left to right.
Equilibrium
No. Price Quantity Quantity Trend of

(Rs. Demanded Supplied Price
Per kg) (Thousand (Thousand
kgs/ kgs/
month) month)
1 25 20 42 Downward
2 20 25 38 Downward
3 15 32 32 Stationary
4 10 42 22 Upward
5 5 55 0 Upward
• Before point 3, the supply is more so prices will fall.

• After point 3, the demand is more so prices will rise.
• At point 3, amount demanded is equal to the amount
22
supplied. This price is called as “equilibrium price”.

Market Analysis – How important is

property valuation?

• Any analysis of valuation includes study of market,
analysis of neighbourhood and the region. Specific
analysis of neighbourhood – Identify the number of
properties that are on sale or sold in the market.
• Physical, external, circumstantial and environmental

features of the competing properties are compared with
subject property.
• Identifying the future trends.
• Methods of valuation operate under this. 23

How Efficient is the Real Property

Market?

CYCLIC PROCESS
• Neighbourhood with high demand – prices rise (Prabhat
Road/ Deccan)
• Purchasers flee to other parts (Baner/ Balewadi)
• Demand in the costly part falls, prices fall
• Demand increases in the Balewadi, Prices rise – suppliers
are eager to supply
• Prices rise in Balewadi
(Buyers have knowledge of options, open choice and
uninterrupted flow of goods and to all parts of town.)
24

Market Imperfection

1. Price range of real property is hazy. Accurate
knowledge is difficult to obtain due to nature of
transaction and knowledge.
2. Personal community creates geographical divisions or

local markets.
3. Monopoly situations – persons having monopoly can

take advantage and ask for higher price than market
value.
25

Can We Make the Markets Perfect?

1. Haziness in knowledge of price can be overcome by
using sophisticated valuation techniques, publishing
data about markets, market info, sale analyses etc.
2. Government intervention is required to minimize

dealings cost, Stamp Duty, other fees etc.
3. Spatial monopoly of certain lands can be addressed

through Land Acquisition Act thus facilitating land
supply and keeping prices low.
26

Thank you.

References:
S Datta, 2004, Valuation of Real Property, Eastern Law
House, Kolkata/New Delhi, Chapter 1 - Introduction to
Property Market and Property Value
27
vshruti@nicmar.ac.in

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Session 1.

Valuation Practice in India

Prof. Shruti Vaishampayan 8/11/2020

• Insolvency and Bankruptcy Board of India (IBBI) has been

• Registered valuers are registered for three asset classes:

Valuation Practice in India

Prof. Shruti Vaishampayan 8/11/2020

P B29: Valuation of Properties

Prof. Shruti Vaishampayan 8/11/2020

• Unlike the case of several of goods (or, commodities)

• Durability of the asset

P B29: Valuation of Properties

Importance of Valuer’s Advice

Prof. Shruti Vaishampayan 8/11/2020

P B29: Valuation of Properties

Importance of Valuer’s Advice

Prof. Shruti Vaishampayan 8/11/2020

1. Special knowledge of various property characteristics

P B29: Valuation of Properties

Property Market Aspects

Prof. Shruti Vaishampayan 8/11/2020

2. National Market: Large institutional investors – work

3. International Market: Global investments in world

Property Market Aspects

Prof. Shruti Vaishampayan 8/11/2020

• When one buys land and buildings, it is the ‘change of

• Goods purchased in property market are various ‘rights’.

• Thus “Bundle of Rights” is the commodity in property

P B29: Valuation of Properties

Property Market Aspects

Prof. Shruti Vaishampayan 8/11/2020

Abstract (Rights) + Physical Entity (Land and Buildings) =

• What is being transferred is the bundle of rights.

P B29: Valuation of Properties

Value and Valuation

Prof. Shruti Vaishampayan 8/11/2020

• Today’s world: Product is a result of 3 inputs = Land, Labour

Subjective value of a seller = Production cost + normal profit;

P B29: Valuation of Properties

Value and Valuation

Prof. Shruti Vaishampayan 8/11/2020

• Value of a commodity is not objective or intrinsic. E.g. Value

• E.g. If a builder buys cheaper land in distress sale and

• Value of a commodity is determined by buyers. 11

P B29: Valuation of Properties

Value and Valuation

Prof. Shruti Vaishampayan 8/11/2020

• Valuer has to consider circumstances that may increase

• Valuation can be defined as “carefully considered

P B29: Valuation of Properties

Value and Valuation

Prof. Shruti Vaishampayan 8/11/2020

• Valuers draw comparison of the property and overall

P B29: Valuation of Properties

Factors Affecting Valuation

Prof. Shruti Vaishampayan 8/11/2020

P B29: Valuation of Properties

Demand Side Factors

Prof. Shruti Vaishampayan 8/11/2020

2. Economic Activity – Increase in economic activity such

3. Improved Accessibility – Increase in demand due to

Demand Side Factors

Prof. Shruti Vaishampayan 8/11/2020