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.
• Valuation defines the
– the present value of a property.
– 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 is a multidisciplinary subject involving study
– of economics, law, building construction, study of human
behavior, social customs and study of government policy.

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Need for 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).

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Need for 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 etc.

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Qualification and functions of valuer

• A valuer is a qualified professional who determines

– the value of an asset, such as
• land or property, based on its condition, location, and comparable sales.
– They provide an unbiased and independent opinion of the asset's value
to their client or employer.

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Common terms in valuation

• Cost vs Value
– Cost is the amount a seller incurs to construct the facility.
– Value is the perceived worth of the property to the buyer.
• Gross income
– It refers to the total income earned by an individual from a
property before taxes and other deductions.
• Outgoings
– are the costs incurred by a property owner to maintain and
run a property.
• Taxes, such as property tax, municipal tax, and wealth tax
• Repairs
• Management and collection charges
• Sinking fund
• Loss of rent
• Miscellaneous, such as electric charges for pumps, lifts, etc.
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Common terms in valuation

• Net Income
– equals to Gross income – Outgoings
• Scrap value
– Scrap value is the estimated value of an asset's
parts or materials (steel, brick, wood) after it has
been fully depreciated or is no longer useful.
– It's also known as junk value or demolition value.
• Salvage value
– of a property is the estimated value or expected
resale value of a building or property at the end
of its useful life.

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Common terms in valuation

• Market value
– A property's market value is the estimated price at which it
could sell in the current market, given certain conditions.
– It is determined by the
• type of building, its structure, durability, location, size, shape,
road width, frontage, types and quality of building materials
used, and the cost of these materials.
• Book Value
– The Book Value of the property at a particular year is the
original cost minus the amount of depreciation up to the
previous year.
– The Book Value depends upon the amount of depreciation
allowed per year and will gradually increase from year to
year.
• Book value = Original cost – Depreciation

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Common terms in valuation

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Common terms in valuation

• Assessed value
– A property's assessed value is an estimate of its value used to calculate property taxes
– assessed value is a government-determined estimate of a property's value, based on a
comparison to similar properties

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Common terms in valuation

• Sinking fund
– A building's sinking fund is a savings account that accumulates money over time to cover future
maintenance and repairs.
– A sinking fund is meant for major undertakings like structural repairs.
– Unlike regular maintenance, these include heavy repairs or reconstruction.

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Common terms in valuation

• Capitalized value
– Capitalized value is the current value of an asset, typically real estate.
– based on the income it's expected to generate over its economic life.
– Capitalised value is the amount of money whose annual interest at the highest prevailing rate of
interest will be equal to the net income from the property.
– Investors use capitalized value to determine if an asset is a good investment.

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Common terms in valuation

• Year’s purchase
– Years Purchase, often referred to as “multiples” is a valuation method used to estimate the value
of an income-generating asset over a certain period.
– Year's purchase (Y.P.) value is calculated by assuming a suitable rate of interest prevailing in the
market.
– It can be calculated by dividing 100 by the prevailing market interest rate.
– For example, if the interest rate is 5%, then the year's purchase is 20 years (100/5 = 20)

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Common terms in valuation

• Depreciation
– Depreciation is the gradual decrease in the value of an asset over time due to wear and tear,
obsolescence, or usage.
– The annual depreciation of a building depends on the type of building and is announced by the
Income Tax Act each financial year:
• Residential premises: 5% depreciation rate
• Other buildings: 10% depreciation rate
• Water treatment facility building: 40% depreciation rate
• Temporary wooden structures and tin sheds: 100% depreciation rate

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Common terms in valuation

• Obsolescence
– is the process by which a building's utility or performance declines, which can shorten its lifespan
and reduce its value
• Physical obsolescence
• Functional obsolescence
• Economic obsolescence
• Technological advances
• Changes in preferences

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Common terms in valuation

• Amortization
– amortization is the gradual repayment of a loan.
– This includes a schedule of interest and principal payments of a
loan until the entire amount is repaid with interest.
• Annuity plan
– is one that provides you periodic payments for a term that you
have chosen, for the amount that you pay as premiums.
• Annuity certain (fixed period)
• Perpetual annuity (indefinite period)
• Deferred annuity (annuity commences after some years)

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Methods of calculating depreciation

• Depreciation is the process of calculating the

– loss of value in a property's assets and building over time due to wear and tear.
• Straight-line method
– A common method that spreads the depreciable cost of an asset evenly over its useful life.
– It decrease the book value of their fixed assets due to reasons like wear and tear or obsolescence.
– The amount of depreciation remains the same each year.

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Methods of calculating depreciation

• The constant percentage method (Declining balance method)

– also known as the declining balance method
– It assumes that an asset's value will decrease by a fixed percentage each year.
– It's the most common method used for depreciation calculations, and is often used for tax
purposes and financial statements.

The value of the property of the depreciated cost at

the end of the first year, (C1) = C - DC

The value of the property at the end of the second

year (C2) = C1 - DC1

The value of the property or the depreciated cost at

the end of the m years = C x (S/C)m/n

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Methods of calculating depreciation

• Sinking fund method

– the depreciation of a property is assumed to be equal to the
annual sinking fund + the interest on the fund till that year

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Methods of calculating depreciation

• Quantity survey method

– The quantity survey method is a method for calculating depreciation that involves a detailed study
of a property to determine the extent of physical deterioration.
– It is a cost value method that requires an appraiser to create an inventory of every item used to
construct the property.
– appraiser create a detailed inventory of every item of
• material, equipment, labor, overhead, and fees involved in the construction of a property.
– This method is not routinely used by appraisers because
• it is extremely time consuming.

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Methods of valuation

• Rental method of valuation

– The rental method of valuation is a way to determine the value of a property
by calculating its net income and multiplying it by the year's purchase:
• Calculate net income
– Subtract all outgoings from the gross rent
• Calculate year's purchase
– Use a suitable interest rate to calculate the year's purchase
• Calculate capitalized value
– Multiply the net income by the year's purchase

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Methods of valuation

• Rental method of valuation

– The rental method of valuation is a way to determine the value of a property
by calculating its net income and multiplying it by the year's purchase:
• Calculate net income
– Subtract all outgoings from the gross rent
• Calculate year's purchase
– Use a suitable interest rate to calculate the year's purchase
• Calculate capitalized value
– Multiply the net income by the year's purchase

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Methods of valuation

• Initial cost-based valuation

– Initial cost for constructing the new property is determined, and depreciation is deducted
– The following are the few methods which can be adopted to determine the initial cost,
• Estimated cost from accounts
• Cost from detailed items
• Estimate from plinth area basis
• Estimate from unit rate
• Cube rate estimate

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Methods of valuation

• Direct comparison method

– When the rental value is not known, this method of direct comparison
with the capital value of a similar property of the locality is used.
– In this method, the valuation of the property is fixed by direct
comparison with the capitalized value of similar property in the locality.

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Methods of valuation

• Profit based valuation

– This method of valuation is suitable for commercial properties such as hotels, restaurants,
shops, offices, malls, cinemas, theaters, etc. for which the valuation depends on the profit.
– In such cases, the net annual income is used from the valuation after deducting
• all the outgoings and expenses from the gross income.

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Methods of valuation

• Development method of valuation

– At times some undeveloped or under-developed property is bought,
developed and then offered for sale.
– The valuation in that case would depend on
• initial investment, development cost and expected profit (at least 15%)

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Methods of valuation

• Depreciation method of valuation

– Based on the depreciation method, the valuation of the buildings is
divided into four parts:
• Walls
• Roofs
• Floor
• Doors and windows
– The cost of each part of the property or building at the present rate is
calculated based on detailed measurements of the structure.
– The life of each part is calculated by the formula:
D = P*(100 – rd)n/100)

D = depreciated value
r = rate
d = depreciation
n = age of building in years
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Fixation of standard rents

• Fixation of standard Rent

– Standard rent is the rent which may be charged to a tenent under the law.
• The rent is determined from the
– value of a property.
• Greater the value of a property
– the greater is the rent.
• Procedure to determine the standard rent
– Standard rent or gross rent = Net return or Net rent + Outgoings
– Net return/rent is sum of followings
• A certain annual interest on the cost of construction of the building including the costs for water supply
and sanitary works, electric installations etc.
• Although the rate of interest may reasonably be 12% for investment on building but the allowable rate of
interest under law for Govt. house building loan may be 6% or as specified.
• A certain annual interest on the cost of land.
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Lease

• Freehold property
– is a piece of land or building that an individual or
entity owns completely and without any time limit.
– The owner has full rights over the property,
including the land and any structures built on it.
• Leasehold property
– is a type of real estate where a person, called the
lessee, rents a property from the owner, called
the lessor, for a set period of time.
– The lessee is responsible for paying the lessor
for maintenance
– The property reverts back to the lessor at the end
of the lease.

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Types of lease

• Building lease
– A building lease can be used for a variety of commercial
purposes, including:
• Constructing a building on a plot of land
• Rebuilding or reconstructing a building
• Leasing a developed facility to a department
• Occupational lease
– An occupational lease is a contract that allows someone to
occupy a property, such as an office, shop, or showroom,
for a set period of time in exchange for payment or
services.
• Sub lease
– Lessee can give it for lease to other person.
• Lease for life
– Till death of lessee.
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Mortgage

• Mortgage
– is a loan used to purchase or maintain a home, plot of
land, or other real estate.
• The borrower agrees to repay the lender over time
– typically in a series of regular payments divided into
principal and interest.
• The property then serves as
– collateral to secure the loan.
• Mortgage deed
– is a legally binding contract between a borrower and a
lender that outlines the terms and conditions of a loan
agreement
– Mortgagee is the lender
– Mortgagor is the borrower
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