The lecture discusses valuation techniques for estimating the fair price of properties, with applications in buying, selling, taxation, and securing loans. Various methods for calculating depreciation and property value are explored, including the straight line and constant percentage methods, as well as approaches for determining rent and capital costs. Key concepts include net income, salvage value, and obsolescence, highlighting their impact on property valuation.

1. QUANTITY SURVEYING AND CONTRACT
MANAGEMENT
LECTURE BY:
AKSHATHA B AB E, M.TECH, MISTE.
ASSISTANT PROFESSOR
DEPT. OF CIVIL ENGINEERING
1
Module 5: Unit2: VALUATION

2. 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 property depends on its structure, life, maintenance, location,
bank interest, etc.
Cost means original cost of construction of purchase.

3.  Buying or selling property
 Taxation
 Rent fixation
 Security of loans or
mortgage
 Compulsory acquisition
 Valuation of a property
PURPOSE OF VALUATION

4. 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).
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, betterment charges
etc.

5. Gross income: Gross income is the total income and includes all receipts
from various sources, the outgoing and the operational and collection
charges are not deducted.
Net income or net return: This is the saving or the amount left after
deducting all outgoings, operational and collection expenses from the gross
income or total receipt.
Net Income= Gross Incomes-Outgoings.
Outgoings: outgoings which are required to be incurred to maintain the
revenue of the building.
Scrape value: Scrape value is the value of the dismantled material. In
general the scrape value is about 10 % of total cost of construction.
Scrape value = sale of useable material – cost of dismantling and
removal of the rubbish material.

6. Salvage Value: It is the value of the utility period without being dismantled.
We can sale it as a second hand.
Year’s purchase(Y.P):
Year’s purchase is defined as the capital sum required to be invested in order
to receive an annuity of Rs. 1.00 at certain rate of interest. For 4% interest per
annum, to get Rs. 4.00 it requires Rs.100.00 to be deposited in a bank. To get
Rs.1.00 per year it will be required to deposit ¼ of Rs.100.00 i.e., 100/4 = Rs.
25.00.
Year’s purchase = 100/Rate of interest = 100/i ,
Where, i= rate of interest in decimal.
For 5% interest- 100/5 = 20
For 6% interest- 100/6 = 16.67
Annuity: is the annual periodic payments for repayments of the capital amount
invested by a party. Annuity is either paid at the beginning or at end of each period of
instalment.

7. In case 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.
Year’s Purchase (Y.P) = 1/ (i+Sc)
where s= sinking Fund to replace Rs. 1.00 at the end of the given period.
The fund which is gradually accumulated by way of periodic on annual
deposit for the replacement of the building or structure at the end of its
useful life, is termed as SINKING FUND.
Sinking fund may be found out by the formula.
I= 𝑺𝒊
(𝟏+𝒊)(𝒏−𝟏)
Where S = total amount of sinking und to be accumulated
n= number of years required to accumulate the sinking fund
i= rate of interest in decimal
I= annual installment required.

8. Depreciation: Depreciation is the loss in the value of the property due to
structural deterioration use, life wear and tear, decay and obsolescence.
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
generally increase during later years.
Methods of calculating depreciation:
1) Straight line method
2) constant percentage method
3) sinking fund method
4) quantity survey method.
In all these methods, it is necessary to decide the economic or effective life
of the property

9. 1. STRAIGHT LINE METHOD
In this method it is assumed that the property losses 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.
Annual depreciation D = Original cost – scrap value / life in year
D = C - S/n
Where C- original cost,
S- scrap value,
n- life of property in year and
D- annual depreciation.

10. 2. 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

11. In this 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.
Depreciation of Property = The annual sinking fund + The interest on the
fund for that year
3. SINKING FUND METHOD
At the End
of
Depreciation
for the year
Total
depreciation
Book value
1st year A A C-A
2nd year A+b 2A+b C- (2A+b)
3rd year A+c 3A+b+c C-(3A+b+c)
4th year A+d 4A+b+c+d C-(4A+b+c+d)
If A is the annual sinking fund.
b, c, d, etc., represent interest on the sinking fund for subsequent years,
and
C= total original cost

12. In this 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.
4. QUANTITY SURVEY METHOD
Obsolescence
The value of property or structures become less by its becoming out of date
in style, in structure in design, etc. and this is termed as Obsolescence.

13. DEPRECIATION OBSOLESCENCE
1) This is the physical loss in the
value of the property due to wear
& tear, decay etc.
2) Depreciation depends on its
original condition, quality of
maintenance and mode of use.
3) This is variable according to the
age of the property. More the age,
more will be the amount for the
depreciation.
4) There are different methods by
which the amount of depreciation
can be calculated.
1) The loss in the value of the
property is due to change of
design, fashion, in structure of
the other, change of utility,
demand.
2) Obsolescence depends on
normal progress in the arts,
inadequacy to present or
growing needs etc.
3) This is not dependent on age of
the building. A new building
may suffer in its usual rent due
to obsolescence.
4) At present there is no method of

14. The following are the different methods of valuation:
1) Rental method of valuation.
2) Direct comparisons of the capital value.
3) Valuation based on the profit.
4) Valuation based on cost.
5) Development method of valuation .
6) Depreciation method of valuation.
METHODS OF VALUATION

15. 1. RENTAL METHOD OF VALUATION
In this method, the net income from the building is found out by deducting
all outing goings from the gross rent.
A suitable rate of interest as prevailing in the market is assumed and year’s
purchase is calculated.
Example: Consider a rate of interest as 4%, the Year’s Purchase=100/4= 25
years.
This net income multiplied by Y. P gives the capitalized value or valuation of
the property.
This method is applicable when the rent is known or probable rent is
determined by enquiries.

16. 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.
3. VALUATION BASED ON THE PROFIT
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.

17. 4. VALUATION BASED ON COST
In this case, the actual cost of construction of the building or the cost incurred
in processing the building is considered as the basis to determine the
valuation of the property.
In this case, necessary depreciation is allowed and points of obsolescence are
considered.
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 .
The probable selling price of the plot, the area required and other
expenditures for development is considered for valuation.

18. 6. DEPRECIATION METHOD OF VALUATION
Based on the depreciation method, the valuation of buildings is divided into four
parts:
1.Walls
2. Roofs
3. Floors
4. Doors and Windows
Cost of each part at the present rate is calculated based on detailed measurement.

19. The life of each part is calculated by the formula:
D = P[(100 – rd)/100]n
Where,
D- depreciated value,
P- cost at present market rate,
rd- fixed percentage of depreciation (r stands for rate and d for
depreciation),
n- the number of years the building had been constructed.
To find the total valuation of the property, the present value of land, water
supply, electric and sanitary fitting etc., should be added to the above
value.

20. 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, levelling 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.

21. Net return is worked out based on
Net return = Capital cost / Year’s purchase
If the capital cost is not known, this may be worked out by any method of
valuation.
The owner experts about 2% higher interest than the prevalent interest to
cover up the risk of his investment.
To this net return, all possible expenditures on outgoings are added to get
gross annual rent.
Gross rent = net rent + out goings.

22. OUTGOINGS
Repair
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.
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.

23. THANKS !