Session 10.

Valuation for Residential

Property – Special Case of Rent
Controlled Property
P B29: Valuation of Properties
NICMAR Pune | AY 2020-21
Prof. Shruti Vaishampayan, Architect - Urban Planner
Session 10. Valuation for Residential Property Overview

Introduction

Prof. Shruti Vaishampayan 12/16/2020

• Residential property offers diverse range of properties in
real estate market.
• Valuation of these properties is common exercise and a
challenge to valuer.
• The common variety of residential properties include:
• Single family houses
• Old buildings in multiple occupation
• Rental apartments
• Ownership apartments
• Co-operative housing
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P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Single Family Houses

Prof. Shruti Vaishampayan 12/16/2020

• Such properties are mostly on urban fringe or suburban areas
(sometimes in CBD).
• They are detached houses of 2-3 storied and include gardens
and lawns.
• The privacy enjoyed by them is of utmost value to the
occupants over multiple occupant properties.
• Prestige, amenity, independence and pride are associated with
ownership of such properties.
• Direct capital comparison is most appropriate valuation
method for such properties.
• When given on rent, the complete rights associated to them
may be restricted through covenants. 3

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Valuation of Single Family House

Prof. Shruti Vaishampayan 12/16/2020

• Consider a site of about 3500 sq ft area. FSI permissible is 1.0
and ground coverage of 50% is allowed. Land lord has
constructed a 2-storied building at a cost of Rs 1,400 per sq ft.
Land value is about 2,600 per sq ft. What is the annual rental
value of property and its constraints?

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Valuation of Single Family House

Prof. Shruti Vaishampayan 12/16/2020

• Cost of Building
• Cost of Construction Rs 49,00,000
(@ 1400 over 3500 sq ft)
• Professional fees (@5%) Rs 2,45,000
• Finance charge (@14%) Rs 6,86,000
• Developer’s Profit (@20%) Rs 9,80,000
• TOTAL BLDG COST Rs 68,11,000
• Land Cost
• Land Value @ 2600 Rs 91,00,000
• Stamp duty & Registration (@10%) Rs 9,10,000
• Legal Charges (@1%) Rs 91,000
• Finance charge @ 14% for 1 year Rs 14,01,400
• Developer’s Profit (@20%) Rs 20,02,000 5
• TOTAL LAND COST Rs 1,12,15,400
P B29: Valuation of Properties
Session 10. Valuation for Residential Property Overview

Valuation of Single Family House

Prof. Shruti Vaishampayan 12/16/2020

For the land component,
• Assuming a rate of return of 5% on land value, the rent value of land
= Rs 5,60,770
• However, as only 50% of land is utilised for building, the effective
land rent will be equal to above rent /2 or, Rs 2,80,385
For the building component,
• Assuming a rate of return of 8%, the rent value of building = Rs
5,44,880
Total Rent on Property = Rs 8,25,265
Rent per unit are = Rs 235 / sq ft
• The uncertain area in the above calculation are:
• The element of developer’s profit
• The return on land
• The return on building 6

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Old buildings in multiple occupation

Prof. Shruti Vaishampayan 12/16/2020

• Such buildings are occupied by multiple tenants and property
management can be costly as well as hazardous.
• Rent controls may again restrict the rent from such buildings, leaving
land lords with large liability of maintenance and repairs (especially
with rising service costs).
• Neglect of maintenance and cutting down of repairs make such
property ripe for redevelopment initiated by land lord and ‘marriage
value of property’ arises.
• Legislation can also affect the redevelopment e.g.,
• West Bengal Tenancy Act 1997 bars any negotiation between
tenants and owners on the monetary inducement for vacating
premises
• Maharashtra Rent Control Act 1999 however legalised acceptance 7
of premium or capital payment by tenant for terminating tenancy

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Valuation of Rent Controlled

property

Prof. Shruti Vaishampayan 12/16/2020

• A flat measuring 1000 sq ft has been let out to a tenant 20
year ago at a monthly rent of Rs 2,000, whereas current
market rent is Rs 25 per sft per month.

• You have been asked to compute the value of property with

suitable assumptions.

• There are two approaches to valuation:

• Valuation based on rental income (rented)
• Based on the Marriage value of the property
• Valuation based on rental income (owner occupied)
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P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Rental based valuation

Prof. Shruti Vaishampayan 12/16/2020

• Gross Rent reserved Rs 24,000/-
• Less Outgoings Rs 13,440/-
• Repair and maintenance (@ 20%) – Rs 4,800
• Municipal/Property Tax (@30%) – Rs 7,200
• Management charges (@5%) - Rs 1,200
• Insurance fees/premium (@ 2%) – Rs 240
• Net Rent Income Rs 10,560/-
• Y.P. 5 year @7% 4.1
• Value of rent reserved Rs 43, 296

Assume the revision of rent after 5 years of letting, at 50% of 9

current market value and then it assumes perpetuity character

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Pessimistic value

Prof. Shruti Vaishampayan 12/16/2020

Assume the revision of rent after 5 years of letting at 50% of current
market value and then it assumes perpetuity character.
• Gross Rent reserved Rs 1,50,000/-
• Less Outgoings Rs 69,000/-
• Repair and maintenance (@ 10%) – Rs 15,000
• Municipal/Property Tax (@ 30%) – Rs 45,000
• Management charges (@5%) - Rs 7,500
• Insurance fees/premium (@ 1%) – Rs 1500
• Net Rent Income Rs 81,000/-
• Y.P. of perpetuity @7% 14.2857
• Value of Perpetuity Rs 11,57,142
• Assuming PV of Re 1 in 5 years @ 7% equals 0.713, the Net Value of
Perpetuity – 8,25,042
• Pessimistic Value = Rs 8,68,338 10

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Optimistic value

Prof. Shruti Vaishampayan 12/16/2020

Consider the vacant possession after 5 years at full rental value
by the property.
• Gross rental value Rs 300,000
• Less Outgoings Rs 1,38,000
• Repair and maintenance Rs 30,000
• Municipal tax Rs 90,000
• Management charge Rs 15,000
• Insurance (@1%) Rs 3,000
• Net rental income Rs 1,68,000
Assuming Y.P. of perpetuity @6% (16.67), PV of Re1@6% in 5
years and the depreciation of Rs 90,000/-, the Value =
20,02,776
• Most Optimistic Value = 20,46,072 11

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Marriage Value

Prof. Shruti Vaishampayan 12/16/2020

• Marriage value is the value at which the tenant can give up
tenancy for the payment of premium (or, the value after
deducting the premium acceptable to tenant for vacating
premises)
• In this case, the marriage value is between most pessimistic
and optimistic values, which is equal to Rs 11,77,734
• The land lord can effectively bargain for 50% of this value i.e.,
5,88,867
• Therefore, the negotiated Market Value of the property = Rs
14,57,205

12

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Owner Occupied Property

Prof. Shruti Vaishampayan 12/16/2020

• Consider the vacant possession potential at full rental value of
the property
• Gross rental value Rs 300,000
• Less Outgoings Rs 1,38,000
• Repair and maintenance Rs 30,000
• Municipal tax Rs 90,000
• Management charge Rs 15,000
• Insurance (@1%) Rs 3,000
• Net rental income Rs 1,68,000
• Assuming Y.P. of perpetuity @6% (16.67), the Value is
28,00,560
• After allowing the depreciation of Rs 90,000/-, the Market
Value = 27,10,560 13

P B29: Valuation of Properties

Session 10. Valuation for Residential Property Overview

Thank you!

Prof. Shruti Vaishampayan 12/16/2020

References:
• S Datta, 2004, Valuation of Real Property, Eastern Law House,
Kolkata/New Delhi
• Chapter 9 –Valuation of Residential Property

vshruti@nicmar.ac.in 14

P B29: Valuation of Properties