Lecture 9- Aspects of Land

Valuation
Evaluation of methods, process and product
(Valuation Methods) :
The contractor’s/ method of valuation or;
cost method of valuation (Cost technique)
Revision
How many valuation methods covered in
this subject ?
What are the valuation methods?
What are the differences between these
techniques methods
You need to understand and know the
methodology of each techniques/ methods
And you need to know the limitation of
each techniques.
Lecture 9- Aspects of Land
Valuation
The concept;
The summation of costs equals the market value of the property
(Although cost and value are rarely the same)
The cost of the site plus cost of buildings/improvements = the value of
the property (land/building) as one unit
Used to value properties for which there is a little general demand and
which are rarely sold in the market
Such as related to public building where very little sales comparable
exists
Competition between rival potential users would be unlikely
Therefore reasonable to assume that cost and value are very much related
Frequently adopted in Rating Valuation cases- where property rates is
levied on the value of buildings and site together and also when public
related properties of a specialist nature in land acquisition cases.
 Cost Method The Cost Method estimates the replacement value of a property by analyzing the cost component of the
specific land and building. It lies somewhere between the inferred and the intrinsic methods, and is not a fully autonomous
valuation method.

Value is calculated by adding the free market value of the land as if vacant to the reconstruction cost of the building, minus
depreciation suffered over the years in comparison to a new building.

Procedure
- Estimate the value of the land as if vacant, by comparing it to similar properties.
- Estimate the replacement cost of the building at present. Factors to be considered include site preparation, utilities, types of
building improvements, tenant improvements, and soft costs.
- Assess the depreciation that has occurred to the building and deduct the figure from the replacement cost new.
- Add the estimated worth of the land. The resulting figure will be an indication of the value of the property.
Example:

Market value of land: RM100,000

Replacement cost of the building: RM500,000

Depreciation: RM75,000

Value of property: RM525,000

Advantages and Disadvantages

+ Sets the value at the actual cost or price of the property.
- Relies upon other valuation methods to derive the value of the land.
- Neglects the difference between cost and value, namely that one property might be cheaper than another but generate a
much higher net income.
 Lecture 9- Aspects of Land
Valuation
Methodology;
The method is used to value existing specialist/public buildings
i. The Site Value;
the value of the site is derived from analysis of equivalent sites for public purposes
obtainable in the market
ii. The Building/ Improvement Cost
The building cost comprise of two components, namely
building cost (new)
and allowance for depreciation and obsolescence.
a) Building Cost New
Relates to obtaining the cost of building a new building in the same style and is normally
obtained from Contractor’s cost estimates-Contractors Method
b) Depreciation and Obsolescence
-Deduction is to be made to allow for depreciation of building and obsolescence of design
-Factors determining the allowance for the depreciation of building and obsolescence of
design- physical age of the building, the quality of maintenance & existing condition of the
building
Lecture 9- Aspects of Land
Valuation (FORMULA)
The Valuation Process
The equation for the Cost/Contractors method is as follows;
i. Cost of Site @ RM X
Plus :
ii. Cost of Building (RM A – Y%)
Building Cost New @ RM A

Less:
Depreciation &
Obsolescence Allowance @ Y% __________________
Value of Existing Property RM X + (RMA-Y%)
Lecture 9- Aspects of Land
Valuation
Example;
The valuation of a single storey detach type of town council building located within a
town A. A brief details of the property are as follows:
Land area is approximately 15,000sq.ft and is held in perpetuity
The building is constructed of reinforced concrete structure, plastered brick walls and
clay tiles roof
The building covers a gross floor area of 7,250 sq.ft and is about 70 years old
The building is fitted with standard electrical and sanitary fittings
The building is regularly maintained and is still in fairly good operational usage.

Information obtained from market research and analysis carried out shows the
following;
i. Equivalent sites for public purpose in the market area has been analysed and
indicates a rate of RM15/- to RM 20/-pfs
ii. Cost of building new according to the same style averages RM 165/-pfs
iii. Allowance for Depreciation is @40% and obsolescence is @20%
Lecture 9- Aspects of Land
Valuation
Valuation:
i. Cost of Site
15, 000 sq.ft @ RM 20.00 pfs RM300,000.00
ii. Building Cost
Building Cost New
7,250 fs @ RM 165/-pfs------RM 1,196,250.00
Less:
Depreciation @40% RM 478,500.00
Obsolescence @20% RM 239,250.00 RM 478,500.00
Value of Existing Property say RM 778,700.00
Lecture 9- Aspects of Land
Valuation
Limitation of Method
 Cost is NOT necessarily equals to value
 Where building is of unusual type, the analysis and determination of
building cost will be difficult to determine
 Precise allowances for depreciation and obsolescence is in reality difficult
to determine and is very much dependent on the judgment of an
experienced professional.
 The method should be used as a Method of Last Resort-where no
appropriate comparable data exists.