Ankit Thakur

Assistant professor
Civil Engineering

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CONTAIN
: Introduction


 Free hold property & Lease Hold Property

 Outgoings

 Depreciation & Obsolescence

 Methods of depreciation

 Different forms of value

 Miscellaneous Topics

 Valuation methods for property & land

 Rent & Rent fixation

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 INTRODUCTION
 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 3
it may fetch.
- The estimated value of property depends upon
its power to serve man’s need, location,
amenities, purpose and supply and demand of a
property type.

- It continuously varies with age, physical state

and characteristics of the property itself.

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PURPOSE OF 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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 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.

 Gross income: gross income is the total income and

includes all receipts from various sources the

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 outgoing and the operational and collection charges are
not deducted

 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.

 Court fees: When a case has to be filled 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

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CHARACTERISTICS OF A GOOD VALUER
A valuer is an expert who can workout the market
value of a property based on scientific analysis
and instances of sales.

A good valuer must possess sound knowledge of

the following subjects:
1.Estimating and costing.
2.Planning and designing.
3.Surveying and leveling.
4. Building bye –laws of the local bodies 8

.
5. Law of contracts
6. Land acquisition
7. Experience in construction works.

8. Town planning act.

9. Arbitration.

10. Economic geography.

11. Sociology.

12. Commercial mathematics.

13. Investment principles.

14. Insurance.

15. Money market & rate of interest.

16. Taxation of government.

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17. Report writing.
 FREE HOLD PROPERTY & LEASE HOLD
PROPERTY
 Free hold property:
 The free hold is absolute owner of the property ,
he holds it without any payment in the nature of
the rent. He may sell the property, dived it or
donate or grant it on lease at his sweet will.

 The freehold or owner who grants the lease

known as ‘lessor’ and leaseholder is known as
‘lessee’ .
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A leasehold property:
 The leaseholder is known as lessee and holds
the physical possession(under) of the property
for the definite period under terms and condition
specified in the lease document.

 Incommon practice it give as for 15, 21, 25 or 50

common in practice. When a lease is granted
for a period of 99 it is known as long term lease
and when it is for 999 years it is said to be
perpetuity or for endless duration.

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 The different types of leases:

-Building lease
-Occupation lease
-Sub-lease
-Life lease
-Perpetual lease

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OUTGOINGS
 The term outgoing is used to indicate the expenses
which are to be incurred in connection with the
property so as to maintain the revenue from it .


the usual types of outgoings are briefly
described below:
1. Taxes
2. Repairs and maintenance
3. Management and collection charge
4. Insurance
5. Loss of rent
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7.Sinking fund
8.Ground rent
9.miscellaneous

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1. 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.

- Annual rental value = gross rent – amount of

yearly repairs

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Repair & maintenance:

- 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 in ordinary case.

- And about 1% to 1.5% of the total cost

of construction is provided for repairs and
maintenance.
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 Insurance :
- The amount of actual insurance premium is considered as a n
outgoing expense.
- A property may not be insured at all but this does not
mean that no deduction should be made for insurance
premium
- The rate of premium depend on various factors such as the
type of construction, nature of occupancy ,facilities for fire
 protection and fire fighting etc.
Loss of Rent:
- Part of a property may remain vacant for some period
and will not fetch any rent for that period .Therefore ,the
loss of rent is considered as outgoing expenses and
deducted from the calculated gross rent

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 Management and collection charges
- An agent collects rents for big building and if
estate is large he will also manage the estate.
- Usually the charges vary from 4 to 5%
- For small building it may not necessary to
considered it.

 Sinking Fund:
- Sinking fund is an amount which has to be set a
side at fixed intervals of time out of the gross
income so that at the end of the useful life of the
building or property ,the fund should
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to the initial cost of the property.
accumulate
 Ground Rent :
- The rent which is paid by the
leaseholder for the use of land usually for
the purpose and the privilege of building
on another man’s land is known as ground
rent.

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 Difference between Deprecation and obsolescence
Depreciation Obsolescence
1. This is the physical loss in the value of 1.The loss in the value of the property is
the property due to wear & tear, due to change of design, fashion, in
decay etc. structure of the other, change of utility,
demand.

2. Depreciation depends on its original 2. obsolescence depends on normal

condition, quality of maintenance and progress in the arts, inadequacy to
mode of use present or growing needs etc.

3. this is variable according to the age of 3.This is not dependent on age of the
the property. More the age, more will be building. A new building may suffer in its
the amount for the depreciation. usual rent due to obsolescence.

4. there are different methods by witch the 4. At present there is no method of

calculation of obsolescence. 20
amount of depreciation can be
calculated.
METHODS OF CALCULATING DEPRECIATION
1. Straight line method
2. Constant percentage method
3. Sinking fund method
4. Quantity survey method

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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.

Annual Depreciation (D) = (Original cost –

Salvage
value)/life of years

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 D = (C-V)/n

Where,
D = yearly depreciation value
C = Original cost
V = Scrap or salvage value
n = Utility period of life of
property in years.

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EXAMPLE 1
A person purchased a property for Rs. 20000.
Assume that its net salvage value after 30 yrs will
be 2000. Determine amount of depreciation
each year considering it to be uniform.

Soln:
Annual Depreciation ‘D’ = (C-V)/n
=(20000-2000)/30
=600 per year
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SINKING FUND METHOD
 Inthis 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.

Sc = i/[(1+i)n-1]

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 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 of sinking fund which should be
set aside @ 5%.
Soln :
Coefficient of sinking fund installment
Sc = i/[(1+i)n-1]
= 0.05/[(1+0.05)20-1]
=0.0302
Yearly installment of sinking fund = 0.0302*50000 = Rs
1510 /year

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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.
Soln :
The total amount of sinking fund to be
accumulated at the end of 30 yrs
Sn = (90/100)*4000
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= 36000
Annual instalment of sinking fund ‘s’

=(Sf*i)/[(1+i)n-1]
=(36
000*
0.05
)/
[(1+
0.05
)30-
1]
=
1 28

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3. 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, n- life of

property in year and D –annual depreciation.

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4.QUANTITY SURVEY METHOD.

 Inthis 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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1.
DIMFaFrEkeRtEvaNul TeFORMS OF
VALUE
2. Book value
3. Scrap value
4. Salvage value
5. Accommodation value
6. Distress value
7. Monopoly value
8. Replacement value
9. Investment value
10. Sentimental value
11. Speculative value
12. Annual value
13. Potential value
14. Occupation value 31
15. Present 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. The
market value will differ from time to time according to
demand and supply.

 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 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.
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 Scrap value : 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.

 Salvage Value : 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 machi3n3 e is called Salvage value.
 Distress Value: In case a property is sold at a
lower price than the market value at that time it is
said to have a distress value.

 Monopoly value: In some cases ,the property

possesses certain advantages with respect to
adjoining property due to its location ,size ,shape
etc. the owner may demand fancy price. Such
value of property is known as monopoly value.

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 Replacement value : It is the present value of a
property or portion there of if these have to be
replaced at the current market rates.

 Investment value: It is the value of a property

indicates the amount offered by a prudent
purchaser by keeping in view the advantages of
possessing the property from investment point of
view.

 Sentimental value: When a property is sold or

purchased at higher value than the market value
due to playing of sentiments in the mind of the
advantages of possessing the property from
investment point of view. 35
 Annual value: The local authority has to decide
the annual value of the property so that taxes can
be calculated on that basis. Such annual value
of the property has to be fixed by observing the
principles of rating valuation.

 PotentialValue: When a property is capable of

fetching more return due to its alternative use or
by advantageous planning or by providing
some development work, is known as potential
value.

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MISCELLANEOUS TOPICS
 1. Annuity: 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.

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 Year’s purchase(Y.P):

Year’s purchase is defined as the capital sum required to

be invested in order to receive a net receive a net
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.

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 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 39

interest
 Incase of life of property is anticipated to be
short and to account the accumulation of
sinking fund and interest on income of the
property to replace capital, the year’s
Purchase is suitably reduced.

 Years Purchase :
(Y.P) = 1/ (i+Sf)

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EXAMPLE

Calculate the value of years purchase for a
property if its life is 20 yrs and the rate of interest
is 5%. For sinking fund the rate of interest is
4.5%.
Soln:
Here, R=5% , i = 4.5%
Y.P =1/(i+Sf)
Coeff. Of sinking fund (Sf) = i/((1+i)n-1) =0.0319
Y.P = 1/(.05+.0319)
=12.21

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CAPITALIZED VALUE
 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(Y.P)

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EXAMPLE:
A building has a monthly rent of
Rs.1500.Total outgoings are 20% of gross
rent.Rate of interest on capital is 8%
.Find capitalized value of building.
Soln :
Monthly rent=Rs.1500
Annual Rent=12 x 1500 = Rs.18000
Outgoings = .20 x 18000 =Rs.
3600
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I = 8% = .08 Y.P = 1/i
 =

1/.08
=
12.5

Capitalized value = Net income x Y.P

C.V =N.I x Y.P
= 14400 x 12.5
=Rs. 1,80,000

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VALUATION METHODS FOR PROPERTY AND
LAND
 The following are the different methods of
valuation:-

1) Rental method of valuation.

2) Valuation based on the profit.
3) Development method.
4)Land and building based method

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1) Rental method of valuation.
- In this method, the net rental income from a
property is calculated after deducting all
outgoings from the gross rent, and Y.P is
calculated after adopting the current bank
interest.
so, C.V= N.I x Y.P
Net rent = Gross rent – outgoings

- When the rent from a property is known ,

this method is useful for valuation
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2) Land and Building based method:
- The basic principle of valuation by this method
is to determine the individual market value of
land and simultaneously the individual
depreciated value of building Adding this two
value is the valuation of the property.
- Cost of new construction of building

= Total construction area x present rate of

construction
Now, knowing the age of the building ,
Present value of property = cost of land +
depreciated
cost of
building.
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3) Profit based method
- This method of valuation is very similar to the
rental method of valuation and is most
applicable in case of valuation of shops, hotels,
cinemas, etc.

- In this method net profit id worked out after

deducting all usual outgoings including interest
of capital investment and also remuneration of
labour rendered by owner.

C.V = N.I x Y.P ;

N.I = Total income - Outgoings 48
4) Development method:
- Sometime , undeveloped or underdeveloped

property is bought , developed and then offered

for sale.

- The valuation of such properties would depends

on initial investment , development cost and
expected profit. This method of valuation is base
on …

1. Development of building estates

2. Hypothetical building schemes 49
 Rent : Rent may be defined as an annual or periodic
payment for the use of land or building and land.

 Types of Rent:
1. Standard rent 12.Monopoly Rent
2. Head rent 13.Lease Rent
3. Rack rent 14. Ground
4. Situation rent rent
5. Sitting Rent 15. Fair Rent
6. Subsidized Rent
7. Improved Rent
8. Profit Rent
9. Contractual Rent
10. Gross Rent
11. Net Rent
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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 expenditures
on the following:
 a) raising, leveling 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.

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 To
net return, all possible expenditures on
outgoings are added to get gross annual rent.
(i) Gross rent = net rent + out goings.
(ii) G.I = N.I + Outgoings

w.k.t; G.I =Annual

Income
So ,
Monthly Rent = Annual Rent /12

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