### Valuation

```Er. Gurbakshish Singh Antal
Lect Civil Engg.
Property valuation
Valuation Methods
Need of Valuation
Value Theory
Valuation is both a
Science and an Art!
Valuation is both a
Science and an Art!
Valuation includes components
and knowledge of:
-mathematics
-statistics
-physical (land) planning
-urban planning
-rural planning/agriculture
Valuation components
› -building construction
› -sociology/human
behaviour
› -common sense/feeling
Valuation is the technique of
estimating and determining
the fair price or value of a
property
such as a building, a factory or
other engineering structures
of various types, land etc.
Valuation of a building
depends on
•type of the building,
•building structure and durability,
•on the situation,
•Size of building,
•Shape of building,
•Frontage of building,
 width
 the quality of materials used
in the construction
 present day prices of
materials
The valuation of a
building is determined
on working out its cost of
construction at present
day rate and allowing a
suitable depreciation.
or Selling Property
When it is required to buy or sell a
property, its valuation is required.
 2.Taxation
To assess the tax of a property, its
valuation is required. Taxes may be
municipal tax, wealth tax, Property tax
etc, and all the taxes are fixed on the
valuation of the property.
 3.Rent
Function
In order to determine the rent of a
property, valuation is required. Rent is
usually fixed on the certain percentage
of the amount of valuation which is 6% to
10% of valuation.
 4.Security
of loans or Mortgage
When loans are taken against the
security of the property, its valuation is
required.
 5.Compulsory
acquisition
Whenever a property is acquired by law;
compensation is paid to the owner. To
determine the amount of compensation,
valuation of the property is required.
 6.Insurance,Betterment charges,
speculations Valuation of a property is
also required for Insurance,Betterment
charges, speculations etc.
Information needed
– Land use
– Land area
– Building: size, age, standard etc.
– Yearly costs and incomes
– Other special conditions
Information needed
Seller : Mr A
Date: 04-09-15
Price: 1 200 000
etc.
– Price
– Date of sale
– Seller
• Information about the real property
–
–
–
–
Land use
Land area
Building: size, age, standard etc.
Other special conditions
Information needed
• General information
– Average replacement costs
– Depreciation - time and percent
– Average value of land
• Information about the real property
– Land use
– Land area
– Building: size, age, standard etc.
– Other special conditions
The cost approach
SEK/
USD
Replacement
costs
Depreciation 3.5 %/year
Cost of land
0
Cost value
Age (years)
10
Replacement costs
Depreciation 10 years 3,5 %
Cost of land
Cost
value
1 000
- 350
200
850
Market value
Scrap value
Salvage value
Liquidation value
Insurable value
Book 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.
 Scrap
value may be defined as the
value of materials of dismantle
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. Scrap value of building is
about 10 % of its total cost of
construction.

- The value of building at the end of
utility period without being dismantled
is called the Salvage Value. Another
example is 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.
 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. Scrap
value of machine is Positive
because it will be used for other
purpose.
Liquidation 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 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.

Sinking Fund may be defined as the fund
which is gradually accumulated by way
of periodic on account deposit for the
replacement of building or structure at
the end of its useful life.
 Main function of creating Sinking fund is
to accumulate sufficient to meet the cost
of construction or maintenance or
replacement of structure after its utility
period.

 Depreciation
exhaustion of the usefulness of
a property. This may be
defined as the decrease or
loss in the value of a property
due to structural deterioration,
life wear and tear, decay and
obsolescence.
 HKSSAP
defines depreciation as
the ‘allocation of the
depreciable amount of an asset
over its estimated life’.
 Rateable
Value is net annual letting
value of a property , which is
obtainable
after
deducting
the
amount of yearly repairs from gross
income. Municipal and other taxes
are charged at a certain percentage
on the rateable value.
 Obsolescence
is defined as the overall
decrease in the value of property or
structure due to becoming outdate in
style, in structure or in design.
 i.e an old dated building with massive
walls, arrangement of rooms not suited in
present days becomes obsolete even iif it
is well maintained.

Progress in Art

New invention

Change in Fashion

Improvement in
Design

Change in planning
idea
New trends in
Market



Annuity is the annual periodic payments
for repayment of the capital amount
invested by the party.

These payments are either paid at the
end of year or at the start of year.
Capital cost is the total cost of construction
including land, or the original total amount
required to possess a property.
 It is the original cost and does not change
while the value of the property is the
present cost which may be calculated by
methods of Valuation.

The capitalized value of a property 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. To determine the capitalized
value of a property, it is required to know
the net income from the property and
the highest prevailing rate of interest.
Capitalized Value = Net income x year’s
purchase

 Year’s
purchase is defined as the
capital sum required to be invested in
annual income as an annuity of rupee
one at a fixed rate of interest.

The capital sum should be 1×100/rate of
interest.
Thus to gain an annual income of Rs x at
a fixed rate of interest,
the capital sum should be x(100/rate of
interest).
But (100/rate of interest) is termed as Year’s
Purchase.




Area where Property
Situated
Present Cost of
Material
Heritage value of
Building
Condition of scrap
 Land
value
 Gross income
 On situation
 frontage








He must know the deep knowledge of the
concerned field or subject area.
He must posses Analytical and Computer Skills.
He should know the tolerances for wastage
incurred during construction.
He should be know the Present rates of material
used.
He should be well experienced
He should know the bye laws of that area.
He should posses the leadership and soft skills.
He must know the deep knowledge about the
latest materials and their cost.
Rental Method of Valuation
Direct comparison with the capital
Value
Valuation based on profit
Valuation based on cost
Depreciation Method
In this method, the net income by way of
rent is found out by deducting all
outgoing 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 Year’s Purchase gives the capitalized
value or valuation of the property.
 This method is applicable only when the
rent is known or probable rent is
determined by enquiries.


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. In such cases, the capitalized
value of the property is fixed by direct
comparison with capitalized value of
similar property in the locality.
This method of Valuation is suitable for
buildings like hotels, cinemas, theatres etc
for which the capitalized value depends on
the profit.
 In such cases, the net income is worked out
after deducting gross income; all possible
working expense, outgoings, interest on the
capital invested etc. The net profit is
multiplied by Year’s Purchase to get the
capitalized value.
 In such cases, the valuation may work out to
be high in comparison with the cost of
construction.

 In
this method, the actual cost
incurred in constructing the building or
in possessing the property is taken as
basis to determine the value of
property.
 In such cases, necessary
depreciation should be allowed and
the points of obsolescence should
also be considered.
Walls
Roofs
Floors
Doors and
Windows
And the cost of each part should first be
worked out on the present day rates by
detailed measurements.
 The present value of land and water
supply, electric and sanitary fittings etc
should be added to the valuation of the
building to arrive at total valuation of the
property.

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