Valuation

Unit - 8
Valuation (6hrs) 1. Introduction to property
valuation/assessment.
2. Property assessment methods
Professional Practice (land, builiding etc.)
AR 805 Year : V Part :1 3. Valuation assessment as per
guidelines of the Nepal Rastra
Bank.
 Valuation - Definition
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.
• Valuation – Art of assessing the present fair value of a
Valuation

property at a stated time. = estimate of anything in terms

of money.
• Not an arbitrary process > facts and indication +
reasoning + interpretation
• may change in very short time – Hence date and
place must be mentioned
 Valuation - Purpose
•Buying or selling property
•Taxation
•Rent fixation
•Security of loans or mortgage
•Compulsory acquisition
•Valuation of a property
•Insurance Premium
•Acquisition
•Partition
Valuation

•Probate
•Speculation
 Valuation - Purpose
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
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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 - Purpose
Valuation of a property is also required for insurance
Betterment charges etc.
Probate

Speculation

Partition

Acquisition
Valuation
 Factors affecting value
• Forces of demand and supply
• Rise in population
• Improvement in public schemes
• Cost of construction
• Changes in control system – Rent, price of building
material
• Bank interest
• Abnormal conditions
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• Sentimental attachment
• Non-physical attributes (historicity, possession of of important
person, reminiscence of an event, piece of art of an renowned creator
etc.)
 Valuation-Methods

• Rental Method
• Value of property = net rent x year'spurchase
• Net rent = gross rent – outgoings
• Year's purchase = 1/i (i=interest rate in decimals)
• Land and Building Method
• Individual market value of land + individual depreciated
value of building
• Direct Comparison Method
• comparison with capitalized value of few adjoiningproperties
Valuation

• Profit Based
• Value of property=net profit x year'spurchase
• net profit = gross income-all out goings
• Development Method
• Value of property=initial investment+development
cost+expected profit
 Valuation Methods in Practice
Property Valuation or Real estate valuation
-Fair Market Value
-Land and Building Method
-Rent Method
Fair Market Value
Valuation of 3 bedroom apartment
-enquiry of value of comparable property (online or physically)
-Idea of raw property
-Calculate per sq ft rate. Eg. Rs 10000/sft
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-Deduct broker or flotation cost or for negotiation scope

-Add premium (10-20%) for premium factors i.e. better
location (distance from CBDs), amenities, infrastructure
around, Preferential location charges (for commercial property)
luxury specifications, furniture with depreciation etc
-
 Valuation Methods in Practice
-Land and Building Method
Applicable for under construction property
Step1: Calculate per sft costs
1.1 Land cost
1.2 Finished building costs
1.3 Marketing and overheads (10%)
1.4 Builder’s profit (20-25%)
Process
-Calc of per unit built up area land cost by inquiry and calc
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-Built up area FAR or FSI, GCR

-Calculation of building cost by floor area cost (per sft)
-Add 10% marketing and overhead on sum of land and building
costs
-Add Builders profit
Step2: Multiply with your flat area
 Valuation Methods in Practice
Step3: Add a premium (10-20%) for better location amenities
etc
Premium factors
•Location-How far from City center/CBDs
•Infrastructure-Schools, Hospitals, Transportation
•PLC-road facing, 3 side open, more frontage, park facing,
higher/lower floor, Direction (East and North)
•Luxury specifications (10-15%)
•Furniture (40-70% depreciation)
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•Amenities (10-15%)
 Valuation Methods in Practice
Rent Yield Method of Property Valuation
-Used for ready to move or rentable property
Rent Yield=Annual Rent/Property Value
Property Value= Annual Rent/Rent Yield
Rental Yields Idea
-For residential property: 3-4%
-For commercial property: 6-8%
For eg
A commercial property with Annual rent 3.6L deserves 3.6/.07
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lakhs
A residential property with annual rent 6 lakhs dererves 6/.015
 Valuation - Terminologies

• Value – worth or utility, varies in time and situation, largely depends upon utility,
scarcity and events.
• Cost – actual construction cost
• Price – cost + profit + interest for investement + managementcost
• Valuation – Art of assessing the present fair value of a property at a stated
time. = estimate of anything in terms of money.
• Not an arbitrary process > facts and indication + reasoning +
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interpretation
• may change in very short time – Hence date and place must be
mentioned
• Scrap Value
• Salvage Value
• Market Value
• Sinking Fund
 Valuation - Terminologies
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.
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Net Income = Gross Income – Outgoings.

Outgoings:- Outgoings which are required to be
incurred to maintain the revenue of building.
 Valuation - Terminologies
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
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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.
 Valuation - Terminologies
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.
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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
 Valuation - Terminologies
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
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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.
 Valuation - Terminologies
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
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accumulated
•n= number of years required to accumulate the sinking
fund
•i= rate of interest in decimal
•I= annual installment required.
 Valuation - Terminologies
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.
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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.
 Valuation - Terminologies
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
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Where C- original cost, S- scrap value, n- life of

property in year and D –annual depreciation.
 Valuation - Terminologies
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, nlife
of property in year and D –annual
depreciation.
Valuation
 Valuation - Terminologies
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.
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 Valuation - Terminologies
Valuation
 Valuation - Terminologies
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.
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 Valuation - Terminologies
Valuation
 Valuation - Methods
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.

Rental method of valuation.

 In this method, the net income by way of rent is
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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.
 Valuation - Terminologies
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.
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•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.
 Valuation - Terminologies
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
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high in comparison with the cost of construction.

 Valuation - Methods
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 .
Valuation
 Valuation - Terminologies
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
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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.
 Valuation - Terminologies
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
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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.
 Valuation - Methods
•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.
Valuation

•Gross rent = net rent + out goings.

.
 Valuation - Terminologies
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.
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- 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.
 Valuation - Terminologies
•Sinking Fund
•Management and collection charges
- 5to 10% of gross income may be taken for this
purpose
- For small building it may not necessary to
considered it
•Loss of Rent
- As it may not be possible to keep whole of the
premises fully let at all times, in such cases a
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suitable amount should be deducted from the

gross rent
•Miscellaneous
- These include:
electrical charges for lighting, running lift, etc and
are borne by the owner
- 2 to 5% of gross rent is taken for these charges.
 Valuation - Methods
Note: If the outgoing are not given in the
question and are to be assumed, the
following percentage may be taken for
solving the problems.
i. Repair @ 10% of the gross income or
rent
ii. Municipal taxes @ 20% of the gross rent
iii. Property tax @ 5% of gross rent
iv. Management and collection charges @
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5% of gross rent
v. Insurance premium @ ½% of gross
income
vi. Miscellaneous charges @ 2% of the
gross rent.
 Valuation - Terminologies
Valuation of real property:
 Valuation of building is depends on the type
of building. Its structure and durability, on the
situation, size, shape, width of road way,
quality of material used in the construction
and present day prise of material.
 Also depend on the locality if it is in market
area having high value then the residential
area.
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 And depending on the specialities in the

building like sewer, water supply, and
electricity ect.
 The value of the building is determined on
working out its cost of construction at
present day rate and allowing a suitable
depreciation.
 Valuation - Terminologies
Valuation of real property:
•The age of the building is generally obtained
from record if available or by enquires or from
visual inspection.
•Present day cost may be determined by the
following methods:
•Cost from record: cost of construction may
be determined from the estimate, from the bill
of quantities, from record at present rate. If
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the actual cost of the construction is known,

this may increase or decrease according to
the percentage rise or fall in the rates which
may be obtained from the public work
department (PWD) schedule of rates.
 Valuation - Methods
 Cost by detailed measurements: If
record is not available, the cost of
construction may be calculated by
preparing the bill of quantities of various
items of works by detailed measurements
at the site and taken the rate for each item
as prevalent in the locality or as current
PWD schedule of rates.
.
Valuation
 Valuation - Terminologies
Cost by plinth area basis: the above
methods are lengthy, a simple method is to
calculate the cost on plinth area basis. The
plinth area of the building as measured and
the present day plinth area rate of similar
building in the locality is obtained by
enquiries and then the cost is calculated.
•Method of valuation: the following are the
different methods of valuations:
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1) Rental method
2) Profit based method
3) Depreciation method
 Valuation - Methods
Valuation
 Valuation - Terminologies
Fixation of rent:
•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.
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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.