CH.

6 VALUATION

Prof. Maulik Kakadiya

Department of Civil Engineering
Uka Tarsadiya University, Bardoli,
Gujarat, INDIA
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 a property depends on :

I. Nature of structure
II. Life
III. Maintenance
IV. Location
V. Bank interest
VI. Legal control
VII. Supply and demand
VIII.Purpose of valuation
3
Value, Cost and Price

4
1. COST
The original cost of construction or purchase
2. VALUE
“
➜ The present value that may be higher
lower than the cost. The valuation of a
building is determined on working out its

➜ cost of construction at present day

rate and allowing a suitable
depreciation.

6
3. PRICE
• Price = Cost of Production
➜ + Interest on Investment
➜ + Profit to vendors/contractor
• Selling Price is fixed for a commodity.
• For less demand the selling price may have to be fixed at lower of
vice versa.

7
Purpose of
Valuation
8
1. Buying or selling property.
when it is required to buy or sell a property, its valuation is required
2. Security of loans or mortgage.
When loans are taken against the security of property , its valuation is
required. It is also referred to as valuation for mortgage purposes.
3. Rent fixation
In order to determine the rent of a property valuation is required.
Rent is usually fixed on certain percentage of the amount of valuation
(5% to 10% of the valuation).
4. Insurance
For the purpose of taking out an insurance policy of the property, the owner
desires to know the replacement value of the property . In this case , the
value of land is excluded or omitted.9
5. Taxation
To assess the tax of a property , its valuation is required. Taxes may be municipal tax,
property tax, wealth tax, etc. and all the taxes are fixed on the valuation of the property
6. Compulsory acquisition
sometimes, a property is acquired by law for some public purpose. In that case, the
injured party is to be paid a suitable amount of compensation for the property thus
acquired. To determine the amount of compensation valuation of the property is required.
7. Betterment charges
when the property comes under some town planning scheme of the area, its value increases
and consequently, the owner of the property is required to pay additional tax, known as the
betterment charges. It becomes, therefore necessary for the property to know the value of
his property before and after completion of town planning schemes.

10
8. Speculations
When a purchase is intended for sale of the property and make some profit, a
short period valuation is necessary for that purpose and this is known as
speculative value. Generally speculative value is lesser than the market value.
9. Court fees
When a case has to be filed with respect to a real estate, it becomes necessary
to affix stamp of suitable amount. This amount is worked out after arriving at
the value of the property under dispute.
10. Gift tax
When a property is gifted, valuation of the gifted property is necessary to pay gift tax to
the government by the person whom the property has been gifted
11. Balance sheet
Sometimes, a company requires valuation of its premises for the purpose of showing
them in the balance sheet.
11
Different forms of values

➜ Market value ➜ Replacement value

➜ Book value ➜ Investment value
➜ Scrap value ➜ Sentimental value
➜ Salvage value ➜ Speculative value
➜ Accommodation ➜ Annual value
value ➜ Potential value
➜ Distress value ➜ Occupation value
➜ Monopoly value ➜ Present value

12
1. 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.

The market value will differ from time to time according to demand and
supply.

The market value also changes from time to time for various
miscellaneous reasons such as changes in industry, changes in fashions,
means of transport, cost of materials and labour etc.
2. BOOK VALUE
“
➜ Book value is the amount shown in the account book after allowing
necessary depreciations.

➜ The book value of a property at a particular year is the original cost

minus the amount of depreciation up to the previous year.

➜ Book value = Original cost – depreciation up to previous year

➜ Book value depends on the amount of depreciation allowed per year

and will be gradually reduced year to year and at the end of the utility
period of the property, the book value will be only scrap value.
14
3. SCRAP VALUE
➜ Scrap value may be defined as the value of materials of dismantled
buildings. After the completion of utility period, the dismantled materials
such as steel, timber, bricks and furniture will fetch a certain amount which
is called scrap value of building.

➜ In case of machines, the scrap value is the value of the metal or the
value of the dismantled parts.

➜ Scrap value of building is about 10% of its total cost of construction.

➜ The cost of dismantling and removal of the rubbish material is deducted

from the total receipt from the sale of the useable materials to get the actual
scrap value. 15
4. SALVAGE VALUE
➜ The value of building at the end of utility period without being
dismantled is called the Salvage Value.

➜ A machine after the completion of its usual span of life , may be sold or
purchased by some one for other use. The sale value of that machine is
called Salvage value.

➜ It does not include the cost of removal, sale, etc.

➜ Salvage value of a property or an asset may be positive, zero or negative.
➜ For example the salvage value of RCC structures is negative, because
dismantling and removal will be costly. Salvage value of machine is
Positive because its parts may be used for other purposes.
16
5. RATABLE VALUE
➜ Ratable value is the net annual letting value of a property, which is
obtained after deducting the amount of yearly repairs from the gross
income.

➜ Ratable value = Gross income – yearly repair cost

➜ Municipal and other taxes are charged at a certain percentage on the

ratable value of the property.

17
6. Assessed Value: Value of a property recorded in the register of a
municipality in order to determine the amount of municipal taxes to be
collected from owner of property. Generally it is 5% of estimated cost of the
property

7. Distress Value: Value when sold at lower price than market value
due to
– Financial difficulties of the seller
– Court Decree
– Insufficient knowledge of the seller
– Quarrel among partners
– Panic due to war or riots or civil commotion

18
8. Replacement Value: Present value of a property or portions
thereof to be replaces at current market rates

9. Potential Value: Property fetching more return due to its

alternative use or advantageous planning or providing some
development works

10. Monopoly Value: Land is scarce, sale of property may attract

fancy price.

11. Sentimental Value: Owner wants to purchase some specific

property at any cost because he/she
19has sentiment attached to it.
12. Speculative Value: speculation on property like some
development or road or waterline will pass near to it, will increase
value in future and sell at them time. Make profit

13. Accommodation Value: as city expands in terms of

accommodation, adjacent agriculture land will see hike in value

20
TYPES OF INCOME
There are mainly two types of incomes

1. Gross income

2. Net income
1. GROSS INCOME
➜ It is the total income and includes all receipts from various
sources. The outgoings, and the operational and collection charges
are not deducted.

2. NET INCOME or NET RETURN

➜ It is the savings or the amount left after deducting all outgoings,
operational and collection expenses from the gross income or the total
receipt.

➜ Net Income = Gross income - outgoings

22
 OUTGOINGS
Outgoings are the expenses that are required to be incurred in
order to maintain the revenue of the building.

1. Taxes
➜ These include taxes paid by the owner of the property
annually.

➜ Municipal tax, Property tax, Wealth tax etc.

➜ These taxes are fixed on the basis of the ‘Annual Rental Value’ of
the property after deductions for annual repairs etc.
MUNICIPAL TAXES
➜ The municipality needs money in order to undertake and maintain
public utility facilities. The same is collected by imposing taxes on the
property.

➜ Utility works include: Roads, Drainages, Water Supply etc. and their
construction and maintenance.

➜ The taxes are assessed on some percentage basis on the net income
from the property and varies from 10-25% of the net income.

➜ Usually, taxes are lesser for small house and vice versa.
 2. Repairs
➜ Repairs need to be carried out every year in order to maintain a
property in good condition.

➜ The amount spent depends on the age, materials, nature of

construction, use of building etc.

➜ 10 – 15% of the gross income or gross rent or the rent of 1 – 1.5 months
is allowed for repairs.

➜ For annual repairs, 1 – 1.5% of the total cost of construction

may also be taken.
3. Management and Collection charges
➜ These include the expenses on rent collector, chaukidar, lift-man,
pump attendant, sweeper etc.

➜ About 5 – 10% of the gross rent may be taken for this.

➜ For small buildings, none of these might be required and hence there
shall be no outgoings in these accounts.
4. Annual Sinking fund
➜ A certain amount of the gross rent is set aside annually as sinking
fund to accumulate the cost of construction when the life of the
building is over.

➜ It accumulates sufficient amount to meet the cost of construction

or maintenance or replacement of structure after its utility
period.

27
 5.Loss of Rent
➜ The property may not be kept fully occupied all through the year. A
suitable amount is deducted from the gross rent under outgoings.

6.Miscellaneous
➜ This includes electric charges for running lifts, pumps, lighting
common spaces and other similar charges that are borne by the
owner of the building.
TYPES OF PROPERTY
There are mainly three types of property

1. Mortgage

2. Free hold property

3. Lease- hold property

29
 1. MORTGAGE
➜ Money borrowed against the security of a property, that has to be
returned after a specified amount of time.

➜ The person who takes the loan is the Mortgagor and the person who
gives the loan is the Mortgagee.

➜ Relevant documents required for the mortgage transaction is known

as the Mortgage Deed.

➜ Usually 50 – 70% of the valuation is advanced as loan.

 2. FREEHOLD PROPERTY
➜ When the owner is in absolute possession of the property and can
utilize it in any which manner he likes.

➜ He can use the property for himself, grant lease or tenancies for
any period of time.

3. LEASEHOLD PROPERTY
➜ It indicates the physical possession of the property, but the use of
it may be allowed by the original owner (lessor) as per the lease
documents.
 EASEMENT
➜ Privileges and rights that one owner of the property enjoys through or
over the property of another.

➜ The person who enjoys the easement is the Dominant owner and the
owner over whose property the easements are enjoyed is the Servient
owner.

1. Right to use light and air from an adjoining property.

2. Right of flow of rain water over the other’s land.
3. Right of access from the adjoining owner’s land.
4. Right to run services through the neighbour’s land.
5. Right of support for a building from the adjoining owner’s land.

➜ Easement rights may be granted through documents for uninterrupted

periods of 20 years.
METHODS OF VALUATION
➜ The following are the different methods of
valuation:-
1. Rental method of Valuation
2. Direct comparison with capital value
3. Valuation based on profit
4. Valuation based on cost
5. Development method of valuation

33
1. Rental method of Valuation
➜ Formula:
➜ Net Rent = Gross Rent – All outgoings Capitalized Value = Net rent x Year’s Purchase
➜ Years purchase shall be worked by using bank interest rate
➜ During valuation by rental method the following particualrs shall be considered
– Land and its tenure
– Shape of land or whether it is freehold or leashold on which building is situated
– Cubic Contents of building
– Future life of building
– Gross Rent
– Outgoings
– Years Purchase
– Capital repairs if required
– Value of land from records

34
➜ When rent is maintained for years then market value of property can be
calculated by rental method
➜ This method is useful for a property with new building
➜ Difficulty in this method:
 Judicious judgement of outgoings is difficult
 Proportioning between land and building is not easy
 For Years purchase property returns depend on nature of property and nature
of occupants, this is not considered in calculation.
 Sometimes Land and Building method of valuation is used to check the
valuations of Rental Method
35
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.

36
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.

37
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.
38
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 .

39
Capitalized Value
Interest on capitalized value of a property (at highest prevailing
rate) would be equal to net income out of property
➜ Capitalized Value x Interest Rate (i/100) =Net Annual Income or return
or
➜ Net annual return x 100/ i = Capitalized Value
Ex : If a property gives 2.4 lakhs annual income then what should
be the rate of interest so that a purchaser can think of purchasing
that property in 50 lakh
➜ Ans : 4.8%

40
Essential Characteristics of an ideal investment
➜ An absolute safe security of capital ( house with proper documentation)
➜ Stability of income (renting probability is higher if its nearby public
places)
➜ Capital can be realized easily at any time (easily saleable if situation

demands)
➜ Easily collection of income from investment (tenant follows instruction)
➜ Certainty of realization by sale

41
 Years Purchase
• Capitalized Value x i/100 = Net Annual return or
– Capitalized Value = 100/i x Net Annual Return or
– Capitalized Value = year’s purchase x net annual return
• Definition : Capital sum required to be invested in order to receive
a net annual income at a certain rate of interest in perpetuity.
• Year’s Purchase (Y.P.) = 100 / i
We can interpret that A net annual income is received for some number of years
shall equate to capital invested also We can also interpret that to receive 1 rupee
as an annual income, how much capital shall be invested.
• IF you expect ‘x’ amount as annual income, how much capital do
you have to invest?
= X * 100/i
• Example : IF you plan to invest some amount in a property and

“
you expect 8% return on your capital or investment. And that
property provides average monthly rent 25000/-. How much
capital you should invest and for how many years ideally?
• Capitalized Value = 100/8 x (25000x12) = 37.5 lakhs
• Years = 100/8 = 12.5 yrs

43
 Depreciation
➜ Definition: It is loss in the value of property due to its use, life, wear, tear,
decay and obsolescence
➜ Thus Value of property gradually decreases in utility period up to a certain
scrap/salvage value
➜ General decreases in value is called Annual depreciation
➜ Present Value is worked considering annual rate of physical deterioration
multiplied by building’s age
➜ There are 3 Types of Depreciation
 Physical
 Functional
 Contingent
 Obsolescence
• Physical Depreciation
– Due to wear and tear from operation
• A ware house is used for heavy machinery movement will see more depreciation rate.
– Decrepitude (action of time and elements)
• A building situated in rough weather will see more depreciation rate as compared to calm weather.
• Functional Depreciation
– Due its constant use, i.e. a vehicle used for 10000 km in 2 yrs will see more functional depreciation as
compared to the one used for 5000 km in 2 yrs.
– When a property has single bathroom for 2 bedroom will see more functional depreciation.
• Contingent Depreciation
– Accidents, structural defects
– Diseases (parasites, pollution of water in building)
– Diminution of supply (natural gas, water)
• Obsolescence: It is Loss of value of property due to change in:-
– Fashions, Design, Structure
– Inadequacy due to present needs
– Necessity for replacement due to new invention
– Old load bearing structure will see more obsolescence value than RCC one.
• Internal Obsolescence:
– Due to Odd original design
– Change in type of construction
– Change in utility demand
• External Obsolescence:
– Due to location of building
– Change in character of district
– Factories or pollution in proximity
– Traffics, noises
– Zoning laws
 Depreciation and Obsolescence
Depreciation Obsolescence
➜ Physical loss in the value of the property due ➜ Loss in the value of the property due to
to wear, tear and decay etc. is known as change in design, in fashion, in structures,
depreciation. etc. is known as obsolescence.
➜ The decrease in the value of the property is ➜ The value of property increase or decrease
gradual and slow. at a rapid rate.
➜ Depreciation depends on its original condition, ➜ Obsolescence depends on normal progress
quality of maintenance and mode of use. in the arts, inadequacy to present or
growing needs, etc.
➜ This is variable according to the age of the
property. More the age, more will be amount ➜ This is not dependent on age of the
for depreciation. building. A new building may suffer in its
usual rent due to obsolescence.
➜ There are different methods by which the
amount of depreciation can be calculated. ➜ At present there is no method of calculation
of obsolescence.
47
 Methods of calculating Depreciation

■ Straight line method

■ Constant percentage method
■ Sinking fund method
■ Quantity survey method
 Straight line method
■ In this method it is assumed that the property loses 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.
C−S
■ D=
n

D = Annual depreciation
C = original cost
S = scrap value
N = life in year
■ Depreciation of the property after m years
C−S
= ×m =m×D
n
■ Book value after m years
C−s
=C− ×m =C−m×D
n
 Constant percentage method

■ In this method it is assumed that the property will lose its value by a constant
percentage of tis value at the beginning of every year.
1
S n
p=1 −
C
p = percentage rate of annual depreciation
S = scrap value
C = original cost
n = life of years
 Sinking fund method

■ In this method the depreciation of the property is assumed to be equal to the

annual sinking fund plus the interest on the sinking fund for that year.
■ A= Annual sinking fund
■ b,c,d,…etc. = interest on the sinking fund for the subsequent years.
■ C= original cost
Life in years Annual Interest Depreciati Total Book value
sinkin in sinking on for depreciati
g fund fund that year on
1 A - A A C –A
2 A b A+b 2A+b C – (2A+b)
3 A c A+c 3A+b+c C – (3A+b+c)
4 A d A+d 4A+b+c+d C – (4A+b+c+d)
So on…

If i is the rate of interest, annual sinking fund installment to accumulate 1 Rs. In

n years.
i
p=
(1+i)n−1
If i is the rate of interest and 1 Rs. Is deposited every year total sinking fund
accumulated at the end of n years is
(1+i)n−1
q=
i
Rate of depreciation in n years
= (p×q)%
The cost of newly constructed building was Rs. 150000. the life of building is 75
years. Determine the depreciation in the 30th year of life by straight line method,
constant % method, and sinking fund method at the 8% compound interest. The
scarp value of building is 10% of its construction cost.
■ C = Rs 150000
■ S = 0.10×150000 = 15000 Rs.
■ N= 75 years i = 8%
(i) straight line method
D = C−S = 150000 −15000 = 1800 𝑅𝑠.
n 75
 total depreciation after m = 30 years
= 18000×30 = 54000 Rs.
(ii) Constant percentage method
m 30
S n 15000 75
p= 𝐶 C
= 150000 150000
= 150000 × 0.3981 = 59715 𝑅𝑠.
Total depreciation after 30 years (C-
S) = 150000 – 59715 = 90285 Rs.
■ (iii) sinking fund method
(C – S) = 150000 – 15000 = 135000 Rs.
Sinking fund coefficient for 75 years life
i 0.08
p= (1+i) n−1
= (1+0.08) 75−1
= 2.498 × 10−4
(1+i) n−1 (1+0.08) 30−1
q= = = 113.28
i 0.08
Rate of depreciation for 30 years
p×q = 2.498 × 10−4 × 113.28 = 0.02829
Total depreciation in 30 years
(C – S)×0.02829 = 135000×0.02829 = 3819.15 Rs.
 Want big impact?
Use big image.

55
Use diagrams to explain
your ideas
Lorem Ipsum

Lorem Ipsum Lorem Ipsum

Lorem Ipsum Lorem Ipsum Lorem Ipsum Lorem Ipsum

56
And tables to compare
data
A B C

Yellow 10 20 7

Blue 30 15 10

Orange 5 24 16

57
 Maps

our office

58
Find more maps at slidescarnival.com/extra-free-resources-icons-and-maps
89,526,124
Whoa! That’s a big number, aren’t you proud?

59
 89,526,124$
That’s a lot of money

185,244 users
And a lot of users

100%
Total success!
60
 Our process is easy
Vestibulum congue
03 tempus
Lorem ipsum dolor sit amet, consectetur
adipiscing elit, sed do eiusmod tempor.
Donec facilisis lacus eget mauris.

Vestibulum congue
tempus
Lorem ipsum dolor sit amet, consectetur
adipiscing elit, sed do eiusmod tempor.
Donec facilisis lacus eget mauris.

01 02
Vestibulum congue
tempus
Lorem ipsum dolor sit amet, consectetur
adipiscing elit, sed do eiusmod tempor.
Donec facilisis lacus eget mauris.

61
Let’s review some concepts
Yellow
Is the color of gold, butter
and ripe lemons. In the
spectrum of visible light,
yellow is found between
green and orange.
Yellow
Is the color of gold, butter
and ripe lemons. In the
spectrum of visible light,
yellow is found between
green and orange.
Blue
Is the colour of the clear
sky and the deep sea. It is
located between violet
and green on the optical
spectrum.
Blue
Is the colour of the clear
sky and the deep sea. It is
located between violet
and green on the optical
spectrum.
62
Red
Is the color of blood, and
because of this it has
historically been
associated with sacrifice,
danger and courage.
Red
Is the color of blood, and
because of this it has
historically been
associated with sacrifice,
danger and courage.
You can insert graphs from Excel or Google Sheets

63
Mobile project
Show and explain your
Place your screenshot here
web, app or software
projects using these
gadget templates.

64
Tablet project
Show and explain your
Place your screenshot here
web, app or software
projects using these
gadget templates.

65
Desktop project
Show and explain your
Place your screenshot here
web, app or software
projects using these
gadget templates.

66
Thanks!
Any questions?
You can find me at:
➜ @username
➜ user@mail.me

67
Credits
Special thanks to all the people
who made and released these
awesome resources for free:
➜ Presentation template by
SlidesCarnival
➜ Photographs by Unsplash

68
Presentation design
This presentation uses the following typographies:
➜ Titles: Atma
➜ Body copy: Quicksand
Download for free at:
https://github.com/BlackFoundryCom/Atma
https://www.fontsquirrel.com/fonts/quicksand

You don’t need to keep this slide in your presentation. It’s only here to serve you
as a design guide if you need to create new slides or download the fonts to edit
the presentation in PowerPoint®

69
Extra resources · Build your own monsters

70
 SlidesCarnival icons are editable shapes.

This means that you can:

➜ Resize them without losing quality.

➜ Change fill color and opacity.
➜ Change line color, width and style.

Isn’t that nice? :)

Examples:

Find more icons at slidescarnival.com/extra-

free-resources-icons-and-maps

71
Diagrams and infographics

72
😉
You can also use any emoji as an icon!
And of course it resizes without losing quality.
How? Follow Google instructions
https://twitter.com/googledocs/status/730087240156643328

✋👆👉👍👤👦👧👨👩👪💃🏃💑❤😂😉
😋😒😭👶😸🐟🍒🍔💣📌📖🔨🎃🎈🎨🏈
🏰🌏🔌🔑 and many more...
73
 Free templates for all your presentation needs

For PowerPoint and 100% free for personal Ready to use, Blow your audience
Google Slides or commercial use professional and away with attractive
customizable visuals