Valuation

Valuation

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  CE3701-ECVE - Prof.AK 1 CE3701 - Estimation, Costing And Valuation Engineering Prepared By: Dr. A. Ananthakumar, M.E (STRUCT)., Ph.D., COURSE OBJECTIVE: The students will acquire knowledge in estimation, tender practices, contract procedures, and valuation and will be able to prepare estimates, call for tenders and execute works. Credit 3
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  August 7, 2026 CE3701-ECVE- Prof. AK 2 SYLLABUS UNIT V VALUATION 9 Definitions – Various types of valuations – Valuation methods - Necessity – Year’s purchase-sinking fund- Capitalised value – Depreciation – Escalation – Valuation of land – Buildings – Calculation of Standard rent – Mortgage – Lease - Types of lease Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 3 Unit 5 – Valuation INTRODUCTION Valuation is the process of determining the economic worth of an asset, essential in fields like civil engineering, real estate, and finance. It supports informed decisions in transactions, financing, insurance, and taxation. Key valuation types include market, investment, insurance, and tax valuations. Common methods are the comparative, income, and cost methods. Important concepts in valuation include year's purchase, sinking fund, capitalized value, depreciation, and escalation. Valuing land and buildings involves assessing market value, calculating standard rent, and determining mortgage and lease terms. Leases, such as operating, finance, and sale and leaseback, define the rights and obligations of asset use between lessor and lessee. Accurate valuation is crucial for fair and efficient asset management. Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 4 Valuation Definition The valuation of a building refers to the process of estimating the monetary value of a property. This valuation can be required for various purposes, such as buying or selling property, securing a mortgage, insurance, taxation, or investment analysis. The process involves assessing several factors that influence the building's value, including its physical condition, location, size, and any unique features it may possess. In general before valuation the age of the building should be obtained from record if a available or by enquiries or from visual inspection and its future life should be ascertained. Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 5 General Definitions Gross income: Gross income is the total amount of money earned before any deductions or taxes are applied. Net income: Net income is the amount of money a person or business earns after all expenses, taxes, and deductions have been subtracted from their gross income. Net income = Gross income – outgoings Outgoing: It is the expanses which are required to be incurred to maintain the revenue of the building. Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 6 General Definitions Types of outgoing: 1. Taxes - include municipal tax property tax, wealth tax, etc., 2. Repair - to be carried out every year to maintain a propertyin good condition (1- 1.5% of total cost) 3. Management and collection charges - include the expenses on rent collector, watchman, liftman, pump attended, sweeper, etc.,(5-10% of gross rent) 4. Sinking fund - the gross rentset aside annually as sinking fund to accumulate the total cost of construction when the life of building is over. 5. Loss of rent - The property may not be kept completely occupied in which case an appropriate cost need to be subtracted from the gross rentunder outgoings. 6. Miscellaneous - include electric charges, lift, pump, lighting in common places, etc., Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 7 General Definitions Municipal Taxes: (10 - 25% of net income) The municipality collects property taxes to generate the funds necessary for the maintenance and operation of the public utility services like, roads, drainage, water supply, street light, etc.,. Scrap value: (10% of total cost of construction)  It is the value of dismantled materials.  When the building's life is over at the end of its utility period, the dismantled materials such as steel, bricks, timber, etc., will yield a certain amount, which is the scrap value of the building. Salvage value: Salvage value refers to the estimated worth of a property at the conclusion of its useful lifespan without undergoing demolition or dismantling. Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 8 General Definitions Scrap value: (10% of total cost of construction)  It is the value of dismantled materials.  When the building's life is over at the end of its utility period, the dismantled materials such as steel, bricks, timber, etc., will yield a certain amount, which is the scrap value of the building. Salvage value: Salvage value refers to the estimated worth of a property at the conclusion of its useful lifespan without undergoing demolition or dismantling. Market value: The market value of a property is the estimated amount for which it could be exchanged on the open market under current market conditions between a willing buyer and a willing seller, neither party being under compulsion. Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 9 General Definitions Book value: It is the amount shown in the account book after allowing necessary depreciations. Book value = Original cost - amount of depreciation at last year Capital cost: It is the total cost of construction including land, or the original total amount required to possess a property. Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 10 Types of Valuation Market Value Approach Cost Approach Income Approach Residual Method Profit Method Contractor’s Method Comparable Method Investment Method Depreciated Replacement Cost (RPC) Method Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 11 Types of Valuation Unit 5 – Valuation 1. Market Value Approach This approach estimates the value of a building by comparing it to similar properties that have recently sold in the same area. Key factors considered include location, size, condition, and features. This method is commonly used for residential properties. 2. Cost Approach This method calculates the value of a building based on the cost to construct a similar building at current prices, minus depreciation. It is useful for newer buildings or properties where accurate cost data is available. Replacement Cost Method: Estimates the cost to replace the building with one of similar utility using modern construction methods and materials. Reproduction Cost Method: Calculates the cost to reproduce the building with the same materials, design, and specifications.
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  August 7, 2026 CE3701-ECVE- Prof. AK 12 Types of Valuation Unit 5 – Valuation 3. Income Approach This approach is often used for commercial and rental properties. It values the building based on the income it generates or is expected to generate. Direct Capitalization Method: Estimates the building's value by dividing the net operating income (NOI) by a capitalization rate (cap rate). Discounted Cash Flow (DCF) Method: Projects future income streams from the property and discounts them to present value using a discount rate. 4. Residual Method This method is used for development properties. It calculates the value of a building by estimating the potential revenue from the completed project and subtracting development costs (including construction, finance, and profit).
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  August 7, 2026 CE3701-ECVE- Prof. AK 13 Types of Valuation Unit 5 – Valuation 5. Profits Method This method values properties that are rarely sold on the open market and are typically owner-occupied, such as hotels or nursing homes. It involves calculating the property's value based on its ability to generate profit. 6. Contractor's Method Also known as the contractor's test or the summation method, this approach is used for specialized properties. It involves adding the land value to the depreciated replacement cost of the building and improvements. 7. Comparable Method This method involves comparing the building with other similar properties that have recently sold or are currently on the market. Adjustments are made for differences in features, location, and condition.
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  August 7, 2026 CE3701-ECVE- Prof. AK 14 Types of Valuation Unit 5 – Valuation 8. Investment Method This method is used to value properties that are bought for their investment potential. It involves calculating the present value of future income streams that the property will generate. 9. Depreciated Replacement Cost (DRC) Method This method is used for properties that do not frequently trade on the open market, such as schools or hospitals. It estimates the cost to replace the building and then depreciates it to account for age and condition.
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  August 7, 2026 CE3701-ECVE- Prof. AK 15 Valuation Methods Rental method of valuation Direct comparisons of the capital value Valuation based on profit Valuation based on cost Development method of valuation Depreciation method of valuation Unit 5 – Valuation
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  August 7, 2026 CE3701-ECVE- Prof. AK 16 Valuation Methods Unit 5 – Valuation 1. Rental method of valuation 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 years purchase is calculated. Capitalized value = Net Income x Years Purchase 2. Direct comparisons of the capital value This method may be adapted 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.
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  August 7, 2026 CE3701-ECVE- Prof. AK 17 Valuation Methods Unit 5 – Valuation 3. Valuation based on profit This method of valuation is suitable for buildings like hotels, cinemas, theatres, etc., for which the capitalized value depends on the profit. The net annual income is worked out after deducting from the gross income all possible working expenses, outgoings, interest on the capital invested, etc., Capitalized value = Net profit x Years Purchase 4. Valuation based on cost 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.
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  August 7, 2026 CE3701-ECVE- Prof. AK 18 Valuation Methods Unit 5 – Valuation 5. Development method of valuation If a large place of land is required to be divided into plots after providing for roads, parks, etc., this method of valuation is to be adopted. This method of valuation is used for the property which is in the undeveloped stage or partly developed and partly undeveloped stage. Capitalized value = Net Income x Years Purchase If a building is required to be renovated by making additions, alterations or improvements, the development method of valuation may be used.
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  August 7, 2026 CE3701-ECVE- Prof. AK 19 Valuation Methods Unit 5 – Valuation 6. Depreciation method of valuation This method of valuation the building should be divided into four parts viz. – (i) walls, (ii) roofs, (iii) floors, and (iv) doors and windows and the cost of each parts should first be worked out on the present day rates by detailed measurements, Depreciated value of each part, Where, D - Depreciated value, P -Cost at present market rate, rd-Fixed % of depreciation, n -Number of years In general, rd value, Structures life (years) rd value 100 1.0 75 1.3 50 2.0 25 4.0 20 5.0 The values arrived at will be exclusive of cost of land, water supply, electric and sanitary fittings, etc., and will apply to those buildings only which have been properly maintained. If the repairs had been neglected in the past and the present condition is bad or dilapidated, suitable deduction should be made from the values as deducted above, for neglected repairs.
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  August 7, 2026 CE3701-ECVE- Prof. AK 20 Necessity Unit 5 – Valuation 1. Buying and Selling Property 2. Securing Financing 3. Taxation 4. Insurance 5. Legal and Financing Reporting 6. Investment Analysis 7. Development and Redevelopment 8. Government and Public Policy 9. Dispute Resolution
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  August 7, 2026 CE3701-ECVE- Prof. AK 21 Necessity Unit 5 – Valuation 1. Buying and Selling Property  Valuation helps determine a fair market price for properties, ensuring that buyers and sellers have an objective basis for negotiations.  Investors be sure of on accurate valuations to assess the potential return on investment and to make informed decisions. 2. Securing Financing  Lenders require property valuations to determine the amount of money they are willing to lend against the property as collateral.  Accurate valuations are essential when property owners seek to refinance their existing loans. 3. Taxation  Governments use property valuations to assess property taxes, ensuring that tax assessments are fair and based on the current market value.  When a property is sold, valuation helps in calculating the capital gains tax, which is the tax on the profit made from the sale.
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  August 7, 2026 CE3701-ECVE- Prof. AK 22 Necessity Unit 5 – Valuation 4. Insurance  Valuation determines the appropriate amount of insurance coverage needed to replace or repair a property in case of damage or loss.  Accurate valuations are necessary for fair settlement of insurance claims. 5. Legal and Financial Reporting  Valuations are used to determine the value of real estate within an estate for inheritance and distribution purposes.  Property valuations help in equitable distribution of assets during divorce proceedings.  Businesses use valuations to report the value of their real estate assets in financial statements, ensuring accurate representation of their financial position. 6. Investment Analysis  Investors need property valuations to manage their real estate portfolios effectively, ensuring that their investments are performing as expected.  Accurate valuations help in assessing the risk associated with real estate investments.
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  August 7, 2026 CE3701-ECVE- Prof. AK 23 Necessity Unit 5 – Valuation 7. Development and Redevelopment  Valuation is crucial for determining the viability of development or redevelopment projects, helping developers assess potential profitability.  Accurate valuations guide decisions related to the purchase of land for development purposes. 8. Government and Public Policy  Governments use valuations to make informed decisions about urban planning, zoning, and land use policies.  When the government acquires private property for public use, valuations ensure fair compensation to property owners.
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  August 7, 2026 CE3701-ECVE- Prof. AK 24 Necessity Unit 5 – Valuation 9. Dispute Resolution  Property valuations provide an objective basis for resolving disputes related to property value, whether in court or through alternative dispute resolution mechanisms. 10. Financial Restructuring  Accurate valuations are necessary during bankruptcy to determine the value of assets and liabilities.  Valuations help in assessing the value of real estate assets during corporate restructuring, mergers, and acquisitions.
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  August 7, 2026 CE3701-ECVE- Prof. AK 25 Years Purchase Unit 5 – Valuation YEAR’S PURCHASE Year's purchase is the present value of an annuity of Rs.1 per annum for a certain number of years, or in perpetuity, at a given rate of interest. It indicates how many years' worth of income would be needed to pay for the investment at the current yield. Where, i – rate of interest in decimal For 5% interest, For 6% interest,
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  August 7, 2026 CE3701-ECVE- Prof. AK 26 Sinking Fund Unit 5 – Valuation SINKING FUND A certain amount of the 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. Where, S – total amount of sinking fund i– rate of interest in decimal n – number of years
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  August 7, 2026 CE3701-ECVE- Prof. AK 27 Sinking Fund - Problem Unit 5 – Valuation Example problem 1: A pumping set with a motor has been installed in a building at a cost of Rs. 2,500.00. Assuming the life of the pump as 15 years, work out the amount of annual instalment of sinking fund requires to be deposited to accumulate the whole amount of 4% compound interest. Given data: Total cost of building, S = Rs. 2, 500.00 rate if interest, i = 4% = 4/100 = 0.04 number of years, n = 15 Solution: = Rs. 125
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  August 7, 2026 CE3701-ECVE- Prof. AK 28 Sinking Fund - Problem Unit 5 – Valuation Example problem 2: An old building has been purchased by a person at a cost of Rs. 30,000/- excluding the cost of the land. Calculate the amount of annual Sinking fund at 4% interest assuming the future life of the building as 20 years and the scrap value of the building as 10% of the cost of purchase. Given data: Total cost of building, S = Rs. 30, 000 rate if interest, i = 4% = 4/100 = 0.04 number of years, n = 20 Solution: =Rs. 907.20
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  August 7, 2026 CE3701-ECVE- Prof. AK 29 Capitalized Value Unit 5 – Valuation Capitalized Value Capitalized value is a valuation method that converts a future income stream into a present value. It iscommonly used in property and investment valuation to determine the worth of an assetbased on its ability to generate income over time. The process involves applying a capitalization rate to the net income produced by the asset, resulting in a present value that reflects the asset's worth.
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  August 7, 2026 CE3701-ECVE- Prof. AK 30 Capitalized Value - Problem Unit 5 – Valuation Example problem 1: A property fetches a net annual income of Rs. 900.00 deducting all outgoings. Workout the capitalized value of the property is the rate of interest is 6% per annum. Solution: = Rs. 15003.00
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  August 7, 2026 CE3701-ECVE- Prof. AK 31 Depreciation Unit 5 – Valuation DEPRECIATION Depreciation is the process of allocating the cost of a tangible asset over its useful life. It represents the reduction in value of the asset over time due to factors such as wear and tear, age, and obsolescence. Depreciation is important for accounting, tax purposes, and financial reporting as it provides a systematic way to spread the expense of an asset over the period it is used. Usually a percentage on depreciation per annum is allowed. 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 gradually increases during later years.
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  August 7, 2026 CE3701-ECVE- Prof. AK 32 Methods of Depreciation Unit 5 – Valuation 1. Straight Line Method The straight-line method is the simplest and most commonly used method of depreciation. It allocates an equal amount of depreciation expense each yearover the useful life of the asset. 2. Constant percentage method (Declining balance method) Depreciation is calculated at a fixed percentage of the book value of the asset at the beginning of each period.The amount of depreciation decreases over time because it is applied to the reducing balance of the asset. Annual Depreciation = Book value at Beginning of Year × Depreciation Rate (i)
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  August 7, 2026 CE3701-ECVE- Prof. AK 33 Methods of Depreciation Unit 5 – Valuation Constant Percentage Method: Example problem: If an asset has an initial cost of Rs. 10,000 and a depreciation rate of 20%. Find the annual depreciation using constant percentage method. Solution: i. Annual depreciation (1st year) = 10000 x (20/100) = Rs. 2000/- ii. Annual Depreciation (2nd year) = 8000 x (20/100) = Rs. 1600/-
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  August 7, 2026 CE3701-ECVE- Prof. AK 34 Methods of Depreciation Unit 5 – Valuation 3. Sinking fund method In this method, the depreciation of the property is considered to be equal to the annual sinking fund contribution plus the interest earned on the fund for that year, which is assumed to be invested in interest-bearing investments. If A is the annual sinking fund and b,c,d, etc., represent interest on the sinking fund for subsequent years, and C is total original cost, At the end of Depreciation of the year Total depreciation Book value 1st year A A A 2nd year A + b 2A + b A - (2A + b) 3rd year A + c 3A + b + c A - (3A + b + c) 4th year A + d 4A + b + c + d A - (4A + b + c + d)
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  August 7, 2026 CE3701-ECVE- Prof. AK 35 Methods of Depreciation Unit 5 – Valuation 4. Quantity survey method It is a meticulous approach to determining property depreciation, particularly for complex structures like buildings. It involves a detailed breakdown of the property into its individual components, each assessed for its specific depreciation rate based on factors like wear and tear, obsolescence, and physical deterioration.
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  August 7, 2026 CE3701-ECVE- Prof. AK 36 Escalation Unit 5 – Valuation ESCALATION Escalation in civil engineering and construction refers to the upward adjustment of project costs over time. This increase is typically due to economic factors such as inflation, fluctuations in material prices, or changes in labor costs. As construction projects often span several months or years, accurately forecasting and managing escalation is crucial for preventing budget overruns.
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  August 7, 2026 CE3701-ECVE- Prof. AK 37 Mortgage Unit 5 – Valuation MORTGAGE A mortgage is a loan agreement in which a borrower uses real property, such as a house or land, as collateral to secure the repayment of the loan. The borrower receives funds from a lender and agrees to make regular payments over a specified period until the loan is fully repaid. If the borrower fails to make the required payments, the lender has the legal right to seize and sell the property. Mortgagor: The person who takes the loan Mortgagee: The person who advances the loan
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  August 7, 2026 CE3701-ECVE- Prof. AK 38 Lease Unit 5 – Valuation LEASE The owner of a freehold property may grant permission to another person to use the property, which is known as leasing the property. Lessee or Leaseholder : The person who takes lease Lessor : The owner who grants lease
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  August 7, 2026 CE3701-ECVE- Prof. AK 39 Types of Lease Unit 5 – Valuation 1. Building lease A building lease is a contractual agreement in which the owner of a building grants the right to use and occupy the building to another person or entity for a specified period in exchange for periodic rental payments. The lease outlines the terms and conditions of the arrangement, including the duration of the lease, the rental amount, and the responsibilities of both parties regarding maintenance and use of the property. 2. Occupation lease In this case, the building or structure is constructed by the owner and leased out for occupation for a specific period in exchange for a certain amount of annual rent.
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  August 7, 2026 CE3701-ECVE- Prof. AK 40 THANK YOU… Unit 5 – Valuation