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.
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: municipal tax, wealth tax, property

tax, etc.

• Rent fixation: (6% to 10% of the valuation)

• Security of loans or mortgage:

• Compulsory acquisition:
 Terms used in valuation

Book value: Book value is the amount shows in the

account book after allowing necessary depreciation.

The book value of property at a particular year is the

original cost minus the amount of depreciation year.

The end of the utility period of the property the book

value will be only scrape value.
• Market value: the market value of a property is
the amount which can be obtained at any
particular time from the open market if the
property is put for sale.
• Scrap value: scrape value is the value of the dismantled
material.

• 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.
• Rateable value: rateable value is the net annual letting
value of a property, which is obtained after deducting the
amount of yearly repairs from the gross income. Municipal
and other taxes are charged at a certain percentage on the
rateable value of the property.

• 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.
• Year’s purchase(Y.P):

• The capitalize value which needs to be paid once for all

to receive a net annual income of Re 1 by way of
interest at the prevailing rate of interest in perpetuity
(i.e for an indefinite period) or for a fixed no. of days.

• * Suppose the rate of interest is 5% per annum. One

has to deposit Rs 100 to get Rs 5 per annum Now, to get
Re 1 he has to deposit 100/5 = Rs 20 per annum

• Therefore, YP = 100/ rate of interest =1/R

Capitalised Value:

amount of money whose interest at the highest prevailing rate of

interest will be equal to the net income or net return in

perpetuity (for specific period).

Capitalised value = Net return * Year’s Purchase.

Let annual rent =Rs 3500

Highest rate of interest = 8%

Capitalized value =3500*1/(8/100)= Rs 43750.

• Sinking Fund

• It is the fund which is built up for the sole

purpose of replacement or reconstruction of a
property when it loses its utility either at the
end of its useful life or becoming obsolete.
Annual sinking fund, I = Si /[(1+i)n-1]/ I

Where,

n =number of years required to accumulate the sinking fund

S = Sinking fund to be accumulated in ‘n’ years

i = Rate of interest in decimal

I = annual installment of sinking fund

Example 1

The sinking fund amount of a property is estimated to Rs 50,000

whose future life is 20 yrs. Find the yearly installment of sinking
fund which should be set aside @ 5%.

Solution:

Coefficient of sinking fund installment

S = 0.05/[(1+0.05)20-1]

= 0.0302

Yearly installment of sinking fund = 0.0302*50000 = Rs

1510 /year
Example 2

A property has been purchased by a person at a cost of Rs. 40000

excluding the cost of land. Determine the amount of sinking fund
annually deposited at the rate of 5% compound interest. Assume
the future life of the building as 30 yrs and scrape value of the
building materials as 10% of the cost of purchase.

Solution:

The total amount of sinking fund to be accumulated at the end of 30

yrs, S = (90/100)*40000= 36000

Annual installment of sinking fund ‘s’ =(36000*0.05)/[(1+0.05)30-1]

=1800/(4.325-1) = Rs 541.35
Depreciation: is the loss in the value of the property due to is use,
life, wear, 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.
Straight Line Method
a fixed amount of original cost is lost every year and is
deducted from the original cost as long as the useful service
life and salvage value remain unchanged. Thus at the end of
the utility period only the salvage value remains.
Depreciations
D = (C-S)/n
Where,
D = yearly depreciation value
C = Original cost
S = Scrap or salvage value
n = Utility period of life of property in years.
The book value after number of years, say n1 years
= Original Cost – n1*D
• Constant percentage method or decline
balance method
 Sinking fund method
In this method, the depreciation of a 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 b, c, d, etc. represent
interest on the sinking fund for subsequent years and C = total
original cost, then –
• 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 is based
on some logical grounds without any fixed percentage of
the cost of the property. Only experimental valuer can
work out the amount of depreciation and present value
of a property by this method.
• 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.
• 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.

• Sinking fund: A certain amount of gross rent is set aside

annually as sinking fund to accumulate the total cost of
construction when the life of the building is over. This
annual sinking fund is also taken as outgoings.
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.
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 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.
A three storied building is standing on a a plot of land
measuring 800 sqm. The plinth area of each storey is
400 sqm. The building is of RCC framed structure
and the future life is 70 years. The building fetches a
gross rent of Rs. 1500 per month. Work out the
capitalized value of the property on the basis of 6%
net yield. For sinking fund 3% compound interest
may be assumed. Cost of land may be taken Rs 40
per sqm. Other datas required may be assumed
suitably.
Gross income per year = 1500 X 12 = Rs 18000

Outgoing per annum:

Repairs at 1/12 of gross income = Rs 1500
Municipal tax 20% of gross rent = Rs 3600
Property tax 5% of gross rent =Rs 900
Insurance premium @ ½ % of gross rent = Rs 90
Management charges @ 6% of gross rent = Rs 1080
Other miscellaneous charges @ 2% of gross rent = Rs
360
Sinking fund (rate of Rs 150 per sqm of plinth area) in
70 years at 3% = 400 X 3 x 150 = 180000
0.00043 *180000= Rs.774
Total outgoing per annum = Rs 8304
Net annual return = 18000 – 8304 = Rs. 9696
Capitalised value of the building = Net income X Y.P.
= 9696 X (100/6) = Rs. 1 61 600

Cost of land @ Rs 40 per sqm = 800 X 40 = Rs.

32000

Total value of a property = Rs 193600

A coloniser intends to purchase a land of 1,00,000
sq m area located in the suburb if a big city to
develop it into plots of 700 Sq m each after
providing necessary roads and parks and other
amenities. The current sale price of small plot in
the neighborhood is Rs. 30 per sqm. The
coloniser wants a net profit of 20 %. Workout the
maximum price of the land at which the coloniser
may purchase the land.
• Total area of land = 1,00,000 sq m
• Deduct 30% for road, parks etc. = Rs. 30,000
• Net area for plots = Rs 70000 sqm
• Number of plots at 700 sq m per plot =
70000/700 = 100

• Selling price per plot @ Rs 30 per sqm = 700 X

30 = Rs 21000
• Total price from sale of all plots = Rs 21,00,000
Deduct expanses
Cost of improving of land levelling and dressing @ Rs 0.25 per sqm =
100000 x 0.25 = Rs 25000
Cost of providing metalled roads drainage. Water supply,
electrification @ Rs. 3 per sqm of whole land = 10000 x 3 = Rs.
300000
Engineers and architectures fees for surveying planning, sub-
dividing, supervising @ 3% on the sale price = Rs 21,00,000 X
3/100 = Rs 63000
Other miscellaneous expenses @ 1% on the price = 2100000 x 1/100
= Rs 21000
Colonisers profit @ 20% on the sale price = Rs 420000
Total expenditure = Rs. 8, 29, 000
Maximum price of land in undeveloped stage = Rs 12,71,000
Maximum rate of purchase = 1271000/ 100000 = Rs, 12.71 per sqm
For total amount of Rs 12.71 lakh.
A building is situated by the side of a main road of
Lucknow city on a land of 500 sq m. The built up
portion is 20 m X 15 m.

The building is first class type and provided with

water supply, sanitary and electric fittings, and
the age of the building is 30 years. Workout the
valuation of the property.
• Plinth area of the building = 20 x 15 = 300 sqm
• Assuming the plinth area rate as Rs 200 per
sqm including water supply, sanitary, electric
fittings, cost of building = 300 x 200 = Rs
60000
• Considering life of the building as 100 years,
depreciated value of the building =
P = 60000, n = 30 , rd = 1
D = 44,280

Cost of land assuming Rs 60 per sq m = 500 X 60

= Rs 30,000

Total valuation of the property = 44280 + 30000

= 74,280 Rs.
Mortgage Lease
`
• Occupation lease: Structure is built by the
owner and built up property is given on lease
for the purpose of occupation
• Maintenance of the building is done by the
leaseholder
• Factory – lease period 10-30 years.
 Rent fixation
A building costing Rs 7,00,000 has been
constructed on a freehold land measuring 100
sq m recenlty in a big city. Prevailling rate of
land in the neighbourhood is Rs 150 per sqm.
Determine the net rent of the proporty, if the
expenditure on an outgoing including sinking
fund is Rs. 24000 per annum. Work out also the
gross rent of the property per month.
Cost of construction = Rs 700000
Cost of land @ Rs 150 per sq m = 100 x 150 = Rs
150,000

Net return
On building @ 6% on the cost of construction = Rs
42000
On the land @ 4% on the cost of land = Rs 6000
Gross rent = net rent + outgoing = 48000 + 24000 =
Rs 72000

Gross rent per month = 72000 / 12 = 6000

In a plot of land costing Rs 20000 a building has been newly constructed
at a total cost of Rs 80000 including sanitary and water supply work,
electrical installation, etc.
The building consists of four flats for four tenants. The owner expects 8 %
return on the cost of construction and 5 % return on the cost of land.
Calculate the standard rent for each flat of the building assuming-
Life of the building as 60 years. And sinking fund will be created on 4%
interest basis.
Annual repairs cost at 1 % of the cost of construction.
Other outgoing including taxes at 30% of the net return on the building.
Net return on land per annum = 20000 x 5/100 = Rs
1000
Net return on building per annum = 80000 x 8/100
= 6400

Total net return per annum = 7400

Expenditure on outgoings per annum

Annual repair @ 1% on cost of building = 80000 x 1/100= Rs 800

Sinking fund at 4% for 60 years, on 90% of building cost = R 302.4

Other outgoing at 30% of the net return on building = 6400 X 30 /100

= Rs 1920

Total expenditure on outgoing = Rs. 3022

Gross rent = 7400 + 3022 = Rs 10422 per annum

Standard rent per month = 10422/12 = Rs 868.53

Standard rent per month = 868.53/ 4 = Rs 217.13