VALUATION

INTRODUCTION
• Estimating the value of a Property in terms of Money.
• Value contains –
i) Worth or utility
ii) Inherent Qualities and Good will
• ‘Price is a fact and value is an estimate of what the price ought to be’ . Price of a
thing may not be the same as its Value.
• In Valuation of a Real Property it is the market value of a property. It is the price
that a prudent buyer would pay to a willing seller for a property having due
regard to its existing and potential advantages in an open market.
• Market Value is time related and can change within a short span of time. Time is
the essence of determining the market value of a property.
• Valuation is one such important part of Building Estimation and Costing.
Valuation is done after the project is complete on the latest trends of the land
prices in the market.

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 VALUATION
INTRODUCTION (contd.)
• Valuation of a building depends on the type of the building, its structure and
durability, on the location, size, shape, frontage, width of roadways, the quality of
materials used in the construction and present day prices of materials.
• Valuation also depends on the height of the building, height of the plinth,
thickness of the wall, nature of the floor, roof, doors, windows etc.
• The valuation of a building is determined on working out its cost of construction at
present day rate and allowing a suitable depreciation.

PURPOSE OF VALUATION
i) Buying or Selling Property
When it is required to buy or sell a property, its valuation is required.
ii) Taxation
To assess the tax of a property, its valuation is required. Taxes may be municipal tax,
wealth tax, Property tax etc, and all the taxes are fixed on the valuation of the
property.
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PURPOSE OF VALUATION (contd.)
iii) Rent Function
In order to determine the rent of a property, valuation is required. Rent is usually
fixed on the certain percentage of the amount of valuation which is 6% to 10% of
valuation.
iv) Security of loans or Mortgage
When loans are taken against the security of the property, its valuation is required.
v) Compulsory acquisition
Whenever a property is acquired by law; compensation is paid to the owner. To
determine the amount of compensation, valuation of the property is required.
vi) Insurance
When a property is insured its valuation is essential.
vii) Betterment / Development Charges
Town planning schemes’ development charges are collected from the owners based
on the value of the property.
viii) Court Fees
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In case of disputes it is needed to fix Stamp Duties or giving Decrees.
 VALUATION
PRINCIPLES OF VALUATION DEFINITION OF COST, PRICE AND VALUE
i) Cost : It is the expenditure to produce a commodity having a value. In
construction Industry cost means the original cost of the construction
including the cost of materials and labour. Hence the cost is a FACT.
ii) Price : It is the cost of a Commodity plus additional reward to the producer
for his labour and Capital. In construction industry the original cost of
construction with certain percentage of profit. The profit or additional
reward may be varied from Builder to Builder, and Business to Business
because the Price is a POLICY.
iii) Value: Valuation is an opinion or an estimate which will be determined by
many factors like the purpose, supply, demand, depreciation, obsolescence
etc. Valuation is a function of place, date and purpose.
DEFINITION OF VARIOUS TERMS USED IN VALUATION
a) Real Property - Immovable properties covering land and everything
securely fixed to the land such as buildings, standing trees and subsurface
minerals, if any.

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 VALUATION
DEFINITION OF VARIOUS TERMS USED IN VALUATION (contd.)
b) Free Hold Property - Property in the absolute possession of the owner
and which can be put for his personal use or may be leased or rented
for any period as the owner desires.
c) Lease Hold property - Property in the temporary physical possession
and use as permitted by the original owner (lessor) by a person
(lessee) for a short or long term on periodic payment of lease amount.
d) Easements – The rights and privileges which one owner of a property
enjoys through on the property of another.
e) Market Value – The real fair value of a property arrived between a
willing seller and a willing purchaser prudently transacting a sale.
f) Buyer’s value – Value decided by the buyers as in the case of distress
sales. Generally such a value is lower than the market value.
g) Seller’s Vaue - It is generally above the market value. It is for properties
having some specific advantages, a seller may fix a value to his
property.

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DEFINITION OF VARIOUS TERMS USED IN VALUATION (contd.)
h) Fancy Value - A kind of seller’s value. A high value attached to the property
by virtue of certain sentimental reasons in possessing the property.
i) Fair value – Real value computed as the market value of a property at
any time.
j) Annual Value - Net annual letting value of the property based on which
municipal taxes are rated.
k) Book Value – Value of the property entered in the account book of each
year after showing necessary depreciation. Book value of a property on a
particular year is the original cost less the amount of depreciation upto the
previous year . It therefore depends on the depreciation allowed per year
and not affected by market conditions.
l) Salvage Value - Value of the building at the end of its utility period.
Represents the market value of material that can be salvaged out of it.

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DEFINITION OF VARIOUS TERMS USED IN VALUATION (contd.)
m) Depreciation – It is the gradual decrease of usefulness or value of a
property. This could be due to
• wear and tear
•Structural deterioation
•Decay
•Obsoleteness
It can be calculated as below:
i) Straight line method: A fixed sum is allocated as depreciation every
year –

Annual Depreciation = ( Original Cost – Salvage Value) / Expected life in years.

II) Constant Percentage Method : Where the depreciation for any year
is taken as a constant percentage of the present cost ( the value at the
beginning of the year)
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DEFINITION OF VARIOUS TERMS USED IN VALUATION (contd.)
n) Sinking Fund - On expiry of the utility period , a property is either to be
replaced or reconstructed or rebuilt.
The fund set aside for this purpose is known as sinking fund. It is created by
regular and periodic payments which accumulated at compound interest will
form the amount for such a replacement or reconstruction at the end of the
utility period of the asset/property.
The annual installment for the sinking fund may be derived as:

I = Si / (I + i) n – 1

S = Amount of sinking fund

I = Rate of Interest in decimal (3% as 0.03)
n = Number of years required to create the sinking fund
I = Annual installment required.

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DEFINITION OF VARIOUS TERMS USED IN VALUATION (contd.)
o) Rent - It is a certain periodical profit in money, provision or labour
issuing out of land and tenements.
It is a stipulated sum paid by a tenant for the temporary use and
possession of the property.
It must include :
1. Ground rent
2. Interest on Capital expended in buildings
3. Allowance for profits
4. Sinking fund and
5. A sum for enterprise and risk.
p) Ground Rent - Rent paid for the use of land for the purpose and
privilege of building on another man’s land. There are two types:
1. Secured – Gives security to the ground rent. Such a rent is thus rent from land secured
by buildings. It is something more than a land value and the lessor may obtain possession
of the whole property.
2. Unsecured – when the land is let out without any stipulation that the lessee shall erect a
building on the land , there would not be any additional value to revert to the lessor at the
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termination of the lease. Very little security to the owner with little appreciation.
 VALUATION
DEFINITION OF VARIOUS TERMS USED IN VALUATION (contd.)
q) Rack Rent - Maximum possible annual rent of the land and building.
When the rent is a reasonable return on the investment on land and building
the rent is known as standard rent.
r) Year’s of Purchase (Y.P.) - It is the multiplier of net returns to obtain the
capitalised value of property.
Capitalised value = Net annual Income x years of purchase if the income from the
property is to continue reasonably for a long period.
Y.P = 100 / Rate of Interest

In case the income is likely to continue for a certain number of years only, the Y.P is
reduced in such a way that the income from property will provide not only the interest on Capital
but also a sinking fund to replace the Capital.
Here Y.P = 100 / (rate of interest + allowance for sinking fund)

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DEFINITION OF VARIOUS TERMS USED IN VALUATION (contd.)
r) Capital and Investment - the purpose of investing a Capital in a property
• To obtain security for the Capital
• To obtain an annual return (interest or rent).The rate of interest will depend on the type of
investment. An ideal investment has the following essentials:
a) Absolute Security
b) Stability of returns
c) Certainty of realisataion
d) A fair percentage of returns on the Capital
e) Easiness in collection of Income
f) Easy realisability of Capital.
The Government Securities possess most of the characteristics of the
ideal security. Their rate of interest is low (3.5% to 4.0%).All other
investments are assessed in comparison to Government Securities.
Generally, the average returns from free hold properties are higher.
E.g Grounds – Secured rent - 4.5% to 5.0%; Residences - 6.0% to 7.5%: Flats – 7.0% to
10.0%: Commercial - 6.0% to 8.0% etc.
Lease hold properties are considered 1.0% less secured and their returns will be 1.0% less.
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