What is valuation?

Valuation is the technique of estimation or determining the fair

price or value of property such as building, a factory, other
engineering structures of various types, land etc.

By valuation the present value of a property is defined. The

present value of property may be decided by its selling price,
or income or rent it may fetch.

The value of property depends on its structure, life,

maintenance, location, bank interest, etc.
Cost: means original cost of construction of purchase.
Purpose of valuation?
 Buying or selling property
 Taxation
 Rent fixation
 Security of loans or mortgage
 Compulsory acquisition
 Valuation of a property
Purpose of valuation?

Buying or selling property: When it is required to buy

or to sell a property, its valuation is required.

Taxation: To assess the tax of property its valuation is

required. Taxes may be municipal tax, wealth tax,
property tax, etc., and all taxes are fixed on the
valuation of the property.

Rent fixation: In order to determine the rent of a

property, valuation is required. Rent is usually fixed on
certain percentage of valuation (6% to 10% of the
valuation).
Security of loans or mortgage: When the loans are
taken against the security of the property, its valuation is
required.

Compulsory acquisition: Whenever a property is

acquired by law compensation is paid to the owner. To
determine the amount of compensation valuation of
property is required.

Valuation of a property is also required for insurance

Betterment charges etc.
Gross income: Gross income is the total income and
includes all receipts from various sources the outgoing
and the operational and collection charges are not
deducted.

Net income or net return: This is the saving or the

amount left after deducting all outgoings, operational
and collection expenses from the gross income or total
receipt.
Net Income = Gross Income – Outgoings.

Outgoings:- Outgoings which are required to be

incurred to maintain the revenue of building.

.
Scrape value: Scrape value is the value of the
dismantled material. That means after dismantle we will
get the steel, brick, timber etc. in case of machines the
scrape value is metal or dismantle parts.
In general the scrape value is
about 10 % of total cost of construction.
Scrape value = sale of useable material – cost of
dismantling and removal of the rubbish material.

Salvage Value: It is the value of the utility period

without being dismantled. we can sale it as a second
handle.
Year’s purchase(Y.P):
Year’s purchase is defined as the capital
sum required to be invested in order to receive an annuity of
Re. 1.00 at certain rate of interest.

For 4% interest per annum, to get Rs. 4.00 it requires Rs.

100.00 to be deposited in a bank.
To get Re. 1.00 per year it will be required to deposit ¼ of Rs.
100.00 i,e, 100/4 = Rs. 25.00.

Year’s purchase = 100/Rate of interest

= 1/i , i= rate of interest in decimal.
For 5% interest- 100/5 = 20
For 6% interest- 100/6 = 16.67
 Annuity: is the annual periodic payments
for repayments of the capital amount
invested by a party. Annuity is either paid
at the beginning or at end of each period
of instalment.
 In case of life of property is anticipated to be
short and to account the accumulation of
sinking fund and interest on income of the
property to replace capital, the year’s Purchase
is suitably reduced.
- Year’s Purchase (Y.P) = 1/ (i+Sc)
- where s= sinking Fund to replace Re. 1.00 at the
end of the given period.
 Sinking Fund
 The fund which is gradually accumulated by way of
periodic on annual deposit for the replacement of the
building or structure at the end of its useful life, is
termed as sinking fund.
 Sinking fund may be found out by the formula.
I = Si/(1+i)^n – 1
 Where S = total amount of sinking fund to be
accumulated
 n= number of years required to accumulate the sinking
fund
 i= rate of interest in decimal
 I= annual installment required.
Depreciation: Depreciation is the loss in the
value of the property due to structural
deterioration use, life wear and tear, decay and
obsolescence.
The general annual decrease in the value of a
property is known as annual depreciation.
Usually, the percentage rate of depreciation is
less at the beginning and generally increase
during later years.
Methods of calculating
depreciation:.
 1) Straight line method
 2) constant percentage method
 3) Sinking fund method
 4) Quantity survey method.

In all these methods, it is necessary to

decide the economic or effective life of
the property.
 1) Straight line method
 In this method it is assumed that the property losses
its value by the same amount every year. A fixed
amount of the original cost is deducted every year, so
that at the end of the utility period only the scrap
value is left.
 Annual depreciation D = Original cost – scrap
value / life in year
D = C- S/n
Where C- original cost, S- scrap value, n- life of
property in year and D –annual depreciation.
2) constant percentage method
 In this method, it is assumed that the
property will lose its value by a
constant percentage of its value at the
beginning of every year.

 Annual depreciation D = 1- (S/C)^1/n

Where C- original cost, S- scrap value, n-

life of property in year and D –annual
depreciation.
 3) Sinking fund method
 In this method the depreciation of property is
assumed to be equal to the annual sinking fund plus
the interest on the fund for that year, which is
supposed to be invested on interest bearing
investment.
 If A is the annual sinking fund and a,b,c,d,etc.,
represent interest on the sinking fund for subsequent
years, and C= total original cost.
At the end Depreciatio Total Book value
of n for the depreciatio
year n
1st year A A C –A
2nd year A+b 2A+b C-(2A+b)
3rd year A+c 3A+b+c C- (3A+b+c)
4th year A+d 4A+b+c+d C-
(4A+b+c+d)
4) Quantity survey method.

 In this method the property is studied in detail

and loss in value due to life, wear and tear,
decay, obsolescence, etc., worked out.
 Each and every step is based on some logical
ground without any fixed percentage of the cost
of the property.
 Obsolescence:

The value of property or structures become less

by its becoming out of date in style, in
structure in design, etc. and this is termed as
Obsolescence.
 Depreciation Obsolescence

1) This is the physical loss in the value 1) The loss in the value of the property
of the property due to wear & tear, is due to change of design, fashion,
decay ect. in structure of the other, change of
utility, demand.
2) Depreciation depends on its original 2) Obsolescence depends on normal
condition, quality of maintenance progress in the arts, inadequacy to
and mode of use. present or growing needs etc.
3) This is variable according to the age 3) This is not dependent on age of the
of the property. More the age, more building. A new building may suffer
will be the amount for the in its usual rent due to obsolescence.
depreciation.
4) There are different methods by 4) At present there is no method of
witch the amount of depreciation can calculation of obsolescence.
be calculated.
Methods of Valuation
 The following are the different methods of
valuation:-
 1) Rental method of valuation.
 2) Direct comparisons of the capital value.
 3) Valuation based on the profit.
 4) Valuation based on cost.
 5) Development method of valuation .
 6) Depreciation method of valuation.
1) Rental method of valuation.
 In this method, the net income by way of rent is
found out by deducting all outing goings from
the gross rent. A suitable rate of interest as
prevailing in the market is assumed and year’s
purchase is calculated. This net income
multiplied by Y.P gives the capitalized value or
valuation of the property. This method is
applicable when the rent is known or probable
rent is determined by enquiries.
 2) Direct comparisons of the capital
value.

 This method may be adopted when the rental value is

not available from the property concerned, but there
are evidences of sale price of properties as a whole.
3) Valuation based on the profit.
 This method of valuation is suitable for
buildings like hotels,cinemas,theatres etc for
which the capitalized value depend on the profit.
 In such case the net annual income is worked
out after deducting from the gross income all
possible working expenses,outgoing,interest on
the capital invested.
 4) Valuation based on cost.
 This method of valuation is suitable for buildings like
hotels, cinema theatres etc. for which the capitalized
value depends on the profit. In such cases the net
annual income is worked out after deducting from the
gross income all possible working expressions,
outgoings, interest on the capital invested etc. the net
profit is multiplied by Y.P to get the capitalized value.
In such case the valuation may work out to be too
high in comparison with the cost of construction.
5) Development method of
valuation .
 This method of valuation is used for the
properties which are in the undeveloped stage or
partly developed and partly undeveloped stage.
If a large place of land is required to be divided
into plots after providing for roads park, etc.,this
method of valuation is to be adopted .
 6) Depreciation method of
valuation.
 According to this method the depreciated value of the
property on the present day rates is calculated by the
formula:
D = P[(100 – rd)/100]n
Where,

D – depreciated value
P – cost at present market rate
rd – fixed percentage of depreciation (r stands for rate
and d for depreciation)
n – The number of years the building had been
constructed.
To find the total valuation of the property, the present value of
land, water supply, electric and sanitary fitting etc; should
be added to the above value.
 Rent Fixation of Building
 The rent of building is fixed upon the basis of certain
percentage of annual interest on the capital cost and
all possible annual expenditure on outgoings.
 The capital cost includes the cost of construction of
the building, the cost of sanitary and water supply
work and the cost of electric installation and
alteration if any.
 The cost of construction also includes the
expenditures on the following: a) raising, levelling
and dressing of site b) construction of compound
wall, fences and gates c) storm water drainage d)
approach roads and other roads within the compound.
 Net return is worked out based on :-
 Capita cost / Year’s purchase
 If the capital cost is not known, this may be
worked out by any method of valuation.
 The owner experts about 2% higher interest
than the prevalent interest to cover up the risk
of his investment.
 To this net return, all possible expenditures on
outgoings are added to get gross annual rent.
 Gross rent = net rent + out goings.
 Outgoings:-
 Repair:
- It includes various types of repair such as annual
repair, special repairs, immediate repair, etc.
- Amount to be sent on repairs is 10 – 15 % of gross
income.
 Taxes
- Include municipal tax, wealth tax, income tax,
property tax etc.
- Paid by owner of the property annually and are
calculated on annual rental value of the property after
deducting the annual repairs 15 to 20% of gross
income.