Valuation - Estimation, Costing and Valuation Engineering

SNS COLLEGE OF ENGINEERING
An Autonomous Institutions
Accredited by NBA – AICTE and Accredited by NAAC – UGC with ‘A’
Approved by AICTE, New Delhi & Affiliated to Anna University, Chennai
DEPARTMENT OF CIVIL ENGINEERING
COURSE NAME:
CE8701 - ESTIMATION, COSTING AND VALUATION ENGINEERING
IV YEAR / VII SEMESTER
Unit V: VALUATION -SNSCE
Topic 1 : VALUATION
12/4/2020 SNSCE/ Civil Engg /VII sem / Shanmugasundaram N/ Ap/Civil 1/121

12/4/2020
UNIT V - VALUATION
SNSCE/ Civil Engg /VII sem / Shanmugasundaram N/ Ap/Civil
Definitions – Various types of valuations – Valuation methods - Necessity –
Capitalised value – Depreciation – Escalation – Valuation of land –
Buildings – Calculation of Standard rent – Mortgage – Lease
2/121

12/4/2020
Valuation
.
SNSCE/ Civil Engg /VII sem / Shanmugasundaram N/ Ap/Civil 3/121

12/4/2020
VALUATION

12/4/2020
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, legal control etc.
 It depends on supply on demand and the purpose for which
valuation is required.
5/121

12/4/2020
Valuation
Cost:
 It means original cost of construction of purchase.
Value:
 It means the present value (saleable value) which may be higher or
lower than the cost.
For example:
 A building whole cost of construction is Rs.1 lakh, when put for sale may
fetch Rs.1,10,000.This sale price is the value of the building. sometimes
value may be less than the original cost.
6/121

12/4/2020
Purpose of Valuation
.
1. Buying or selling property
 When it is required to buy or to sell a property, its valuation is required.
2. 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.
3. 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).
7/121

12/4/2020
Purpose of Valuation
4. Security of loans or mortgage
When the 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 property is
required.
6. Valuation of a property is also required for insurance etc.

12/4/2020
Factors affecting the value of the property
1. Supply and demand
2. Increase in population
3. Cost of construction
4. Purpose of purchase
5. Interest and security of capital
6. Rent restriction act
7. Improvement of public schemes
8. Abnormal conditions

12/4/2020
1) Supply and demand
If there are few buyers compared to the number of properties available
for sale in a particular locality, this will result in low prices and vice versa.
2) Increase in population
Sudden increase in population due to the growth of new industries or
influx or due to multiplication will result in heavy demand for land,
buildings and properties.
3) Cost of construction
The present cost of construction affects the value due to rapid change in
price index of materials compared to depreciation.
10/121

12/4/2020
.
4) Purpose of purchase:
The value of property is usually more if the property is for occupational
purposes.
5) Interest and Security of Capital
If the interest in scheduled banks and government securities are lowered,
it will result in making more money available for investment in land and
property and thereby the market value increases.
6) Rent restriction act
The value of a property is calculated from the probable annual income
through rent and so due to certain enactment of a rent restriction act by the
government, it may cause slump in property market.
11/121

12/4/2020
7) Improvement of public schemes
Any public service scheme like sewer line, water line, electricity supply
etc to an area which is lacking in such amenities will make the land value
go up.
8) Abnormal conditions
The value of property may go down due to abnormal conditions like war,
riots or due to insecure conditions.
12/121

12/4/2020
Terminology
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.
Outgoings
Outgoings or the expenses which are required to be incurred to maintain
the revenue of the building.
13/121

12/4/2020
Terminology
Types of outgoings
a) Taxes
b) Repairs
c) Management and collection charges
d) Sinking fund
e) Loss of rent
f) Miscellaneous
a) Taxes
 To be paid by the owner of the property annually i.e. municipal,
property , wealth 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.

12/4/2020
Terminology
b) Repairs:
 It is required to be carried out every year to maintain a property
in fit condition.
The amount to be spend on repairs depends on
 Age
 Construction
 Nature of the building etc
It is usually 10 to 15% of the gross income or 1 to 1 ½ months rent is
allowed for repairs.
 For annual repairs 1 to 1 ½ % of the total cost of construction may also
be taken.
15/121

12/4/2020
Terminology
c) Management and collection charges
 It includes the expenses on rent collector, chaukidar , liftman , pump
attendant ,sweeper etc about 5 to 10% of the gross rent may be taken on
these account.
 For small buildings none of these may be required and there will be no
outgoings on these account.
d) 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.
 Annual sinking fund is also taken as outgoings.
16/121

12/4/2020
Terminology
Loss of rent
 The property may not be kept fully occupied in such a case a suitable
amount should be deducted from the gross rent under outgoings.
f) Miscellaneous
 It includes electric charges for running lift , pump , for lighting common
places and similar other charges which are to be borne by the owner.
2 to 5% of gross rent is taken for these charges
17/121

12/4/2020
Terminology
Important note
If the outgoing are not given in the question and are to be assumed, the
following percentage may be taken for solving the problems.
i. Repair @ 10% of the gross income or rent
ii. Municipal taxes @ 20% of the gross rent
iii. Property tax @ 5% of gross rent
iv. Management and collection charges @ 5% of gross rent
v. Insurance premium @ ½% of gross income
vi. Miscellaneous charges @ 2% of the gross rent.
18/121

12/4/2020
Types of valuation
1) Scrap value 2) Salvage value
3) Market value 4) Book value
5) Rateable value 6) Assessed value
7) Distress value 8) Replacement value
9) Potential value 10) Monopoly value
11) Sentimental value 12) Speculative value
13) Reversionary value
19/121

12/4/2020
Types of valuation
1) Scrap value
 Scrap value is the value of the dismantled material.
That means after dismantle we will get the steel, brick, timber etc.
In case of machines the scrap value is metal or dismantle parts.
In general the scrap value is about 10 % of total cost of construction.
Scrap value = (sale of useable material – cost of dismantling
and removal of the rubbish material)
20/121

12/4/2020
Types of valuation
2) Salvage value
It is the value of the utility period without being dismantled.
We can sale it as a second handle.
3) 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.
This value is changes from time to time for various reasons such as change
in industry, change on fashion, means of transport, cost of material and
labour etc
21/121

12/4/2020
4) Book value
Book value is the amount shows in the account book after allowing
necessary depreciation.
The book value of property at a particular year is the original cost minus
the amount of depreciation year.
The end of the utility period of the property the book value will be only
scrap value.
5) Rateable value
Rateable value is the net annual letting value of a property, which is
obtained after deducting the amount of yearly repairs from the gross
income.
Municipal and other taxes are charged at a certain percentage on the
rateable value of the property.
Types of valuation

12/4/2020
Types of valuation
6) Assessed value
It is the value of property which is recorded in the registers of the
municipality, in order to determine the amount of property taxes to be
collected from the owner.
7) Distress value
When a property is sold at a lower price than the market value at that
time, it is said to have a distress value.
Replacement value: It is the present value of the property, if has to be
replaced at the current market rates.
8) Monopoly value
If land is scarce in a particular area or if certain properties have some
distinct advantages over others, then the owner may demand fancy prices.

12/4/2020 SNSCE/ Civil Engg /VII sem / Shanmugasundaram N/ Ap/Civil
Types of valuation
9) Potential value
When a property is capable of fetching more return due to its alternative
use by advantageous planning or developing it.
10) Sentimental value
The fancy price demanded by the vendor when he attaches some
sentimental value to his property.
11) Speculative value
When a property is purchased with an idea to sell it off at a profit after a
short duration.
12) Reversionary value
Present value of an amount deferred for a certain period at a fixed rate
of interest.
24/121

Thank You
HAPPY LEARNING
25/19

12/4/2020
Terminology
Obsolescence
 The value of property or structures become less by its becoming out of
date in style, in structure in design, etc.
Annuity
 It 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.
1) Annuity certain
2) Annuity due
3) Deferred annuity
4) Perpetual annuity
26/121

12/4/2020
Terminology
.
1) Annuity certain
 If the amount of annuity is paid for a definite no of periods or years.
2) Annuity due
If the amount of annuity is paid at the beginning of each period of year
and payments continued for definite no of periods.
3) Deferred annuity
If the payment of annuity begins at some future date after a no of years.
4) Perpetual annuity
If the payments of annuity continue for indefinite period.
Annuity- annual payments, it is paid by twelve monthly instalments or half
yearly or quarterly instalments.
27/121

12/4/2020
Sinking Fund
Sinking Fund
 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.
 The sinking fund is created by regular annual or periodic deposits in
compound interest which will form the amount of replacement at the end of
the utility period of the property.
 It is created by taking a sinking fund policy with an insurance company
or by depositing in bank to collect highest compound interest.

12/4/2020
Sinking Fund
.
It depends on
 Life of the building
 Scrap value-cost of old materials
Sinking fund may be found out by the formula,
Si
I =
(1+ i)n -1
Where,
S= Total amount of sinking fund to be accumulated
n= no of years required to accumulate the sinking fund
i= rate of interest in decimal(eg. 4%=0.04)
I= Annual instalment required.
29/121

12/4/2020
Sinking Fund
Problem 1
A pumping set with a motor has been installed in a building at a cost of
Rs.2500. Assuming the life of the pump as 15 years, work out the
amount of annual instalment of sinking fund required to be deposited
to accumulate the whole amount of 4% compound interest.
Solution
Si
Annual sinking fund, I =
(1+ i)n -1
2500×0.04
(1+0.04)15-1
I = Rs. 125

12/4/2020
Sinking Fund
.
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.
Solution
Total amount of sinking fund to be accumulated at the end of 20 years,
S= 30,000 × (90 / 100 ) = Rs. 27,000.
Si 27000×0.04
Annual sinking fund, I =
(1+ i)n -1 (1+0.04)20-1
I = Rs. 907.20
31/121

12/4/2020
valuation
Capital cost
 It 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 value of a property is a
present cost which may be calculated by methods of valuation.
Capitalized value
 The amount of a 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 annual income × Year’s purchase
32/121

12/4/2020
valuation
Year’s purchase:
 The capital sum required to be invested in order to receive an annuity of
Re.1 at certain rate of interest.
 For 4% interest per annum, to get Rs. 4 it requires Rs.100 to be deposited
in a bank.
 To get Re.1per year it will be required to deposit ¼ of Rs.100
i.e., 100/4= Rs.25.
Years purchase = 100
Rate of interest
= 1
i
Where, i= rate of interest in decimal
33/121

12/4/2020
In the case of a property whose period of utility is limited to a number of
years a certain amount is required to be set aside in the form of sinking
fund, to accumulate the amount of original capital cost at the end of the
utility period of the property.
 Otherwise the owner of the property will lose both the capital and
income at the end of the utility period.
 Hence the year’s purchase will be reduced in such a way that income of
the property will provide both for interest on the capital and
accumulation of the sinking fund to replace the capital.
 In such cases, year’s purchase = 1
i+ s
valuation

12/4/2020
valuation
Problem 3
3. A property fetches a net annual income of Rs. 900 deducting all
outgoings. Workout the capitalized value of the property if the rate of
interest is 6% per annum.
Given:
Net income = Rs.900 (deducting all outgoings)
Rate of interest ,i = 6%
Solution:
Capitalized value = Net annual income × Year’s purchase
Year’s purchase = 100/ i = 100/6 = 16.67
Therefore , capitalized value = 900 ×16.67
= Rs.15003.00/-

valuation
Problem 4
A three storied building is standing on a plot of land measuring 800 sq
m. The plinth area of each storey is 400 sq m. The building is of R.C.C
framed structure and the future life may be taken as 70 years. The
building fetches a gross rent of Rs.1500 per month. Workout the
capitalized value of the property on the basis of 6% net yield. For
sinking fund 3% compound interest may be assumed. Cost of land
may be taken as Rs.40 per sq m. Other data required may be assumed
suitably.
Solution
Gross income = Rs.1500/ month
Gross income per year = Rs. 1500 × 12
= Rs.18,000.
36/121

12/4/2020
valuation
Capitalized value = Net annual income × Year’s purchase.
Net annual income = gross income per annum – outgoings per annum.
Outgoings per annum: (assuming suitable data).
Outgoings per annum: (assuming suitable data)
Repairs at 1/12 of gross income = 18000/12 = Rs.1500
Municipal tax 20% of gross rent = 18000 × (20/100) =Rs.3600
Property tax 5% of gross rent =18000 × (5/100) =Rs. 900
Insurance premium @ ½% of gross rent=18000×(0.5/100)=Rs.90
Management charges @ 6% of gross rent=18000×(6/100)=Rs.1080
Miscellaneous charges@ 2% of gross rent= 18000×(2/100)=Rs.360

valuation
Sinking fund :
I = Si
(1+i)n-1
= 18000×0.03 = Rs.78
(1+0.03)70-1
Therefore ,
Total outgoings =
Rs.1500+Rs.3600+Rs.900+Rs.90+Rs.1080+Rs.360+Rs.780
per annum = Rs.8310
38/121

12/4/2020
valuation
Net annual income = Gross income – Outgoings
= 18000 – 8310
= Rs.9690
Year’s purchase = 100 = 16.67
6
Capitalized value = Net annual income × Year’s purchase
= 9690 ×× 16.67
Capitalized value of the building = Rs. 1,61,532.3
Cost of land @ Rs.40 sq m = 800× 40 = Rs.32000
Total value of the whole property = Rs.1,61,532.3+ Rs. 32000
= Rs.1,93,532.3/-

Thank You
HAPPY LEARNING
40/18

12/4/2020
valuation
.
Depreciation
 It is the gradual exhaustion of the usefulness of a property.
The loss in the value of the property due to is use, life, wear, 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.
 Factors that causes depreciation are
Accidents like fall of a tree
Obsolescence
41/121

12/4/2020
valuation
Factors that causes depreciation are
Accidents like fall of a tree
Obsolescence
Decay
Changes in demands
Changes in Arts and fashion
Calamity like flood, lightning etc.
Actions of elements of Nature like heat, cold, wind etc.,
Structural deterioration.
Method of calculating depreciation:
1. Straight line method
2. Constant percentage method
3. Sinking fund method
4. Quantity survey method

12/4/2020
valuation
.
Straight line method
In this method it is assumed that the property loses 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.
D = C−S
n
Where,
D = Annual depreciation
C = original cost
S = scrap value
n = life of the property in years.
Depreciation of the property after m years = C − S × m = m × D
n
43/121

12/4/2020
valuation
Book value after m years = original cost – D = C – m × D
Problem 5
Cost of New Building = Rs. 4,00,000
Scrap Value 10% at the end of life = Rs. 40, 000
Life assumed = 60 years
Annual Depreciation = 4,00,000 - 4,000
60
= Rs. 6,000
Depreciation value after 10 years = Rs. 60,000
Depreciation value after 60 years = Rs. 3,60,000

12/4/2020
valuation
.
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 1/n
C
Where,
D = percentage rate of annual depreciation
S = scrap value
C = original cost
n = life of years.
The value of the property or the depreciated cost at the end of the m
years = C S m/n
C
45/121

12/4/2020
valuation
Problem 6
Replacement Value of the Building = Rs. 20,00,000
Age of the Building (n) = 15 years
Depreciation assumed = 2 %
Depreciated value = 20,00,000 1 - 2 15
100
= 20,00,000 (0.98)15
= 20,00,000 (0.73857)
= Rs. 14,77,140
Depreciation factor = 1 – 0.73857 = 0.26143
Depreciation value = (20,00,000 – 14,77,140) = Rs. 5,22,860
Depreciation Percentage = 26.143%

12/4/2020
valuation
.
Sinking fund method
In this method the depreciation of the property is assumed to be equal to
the annual sinking fund plus the interest on the sinking fund for that year.
A= Annual sinking fund
b , c, d,…etc. = interest on the sinking fund for the subsequent years.
C= original cost.
47/121
LIFE
IN
YEARS
ANNUAL
SINKING
FUND
INTEREST
IN
SINKING FUND
DEPRECIATION
FOR THAT
YEAR
TOTAL
DEPRECIATION
BOOK VALUE
1 A - A A C-A
2 A B A+d 2A+b C – (2A+b)
3 A C A+c 3A+b+c C-(3A+b+c)
4 A d A+d 4A+b+c+d C-(4A+b+c+d)

12/4/2020
valuation
If i is the rate of interest, annual sinking fund instalment to accumulate
1 Rs. in n years.
p = i
(1+i)n−1
If i is the rate of interest and 1 Rs. is deposited every year total sinking
fund accumulated at the end of n years is
q = (1+i)n−1
i
Rate of depreciation in n years = (p × q) %

12/4/2020
valuation
.
Quantity survey method
 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 %
of the cost of the property.
 Only experienced valuer can work out the amount of depreciation and
present value of a property by this method.
49/121

12/4/2020
valuation
Problem 7
The cost of newly constructed building was Rs. 150000. the life of
building is 75years. Determine the depreciation in the 30th year of
life by straight line method , constant % method, and sinking fund
method at the 8% compound interest. The scarp value of building is
10% of its construction cost.
Given:
C = Rs 150000
S = 0.10×150000 = 15000 Rs.
N= 75 years and i = 8%
Solution
(i) Straight Line Method
D = C − S = 150000 – 15000 = D = Rs.1800
n 75

12/4/2020
valuation
.
Total depreciation after 30 years =Rs. 1800 × 30 yrs
D @ 30 yrs =Rs. 54000
(ii) Constant Percentage Method:
= C S m/n
C
= 150000 15000 (30/75)
150000
= Rs.59715/-
51/121

12/4/2020
valuation
(iii) Sinking Fund Method:
Sinking fund coefficient for 75 years life,
p = i = 0.08 = 2.498× 10 -4
(1+i)n−1 (1+0.08)75 – 1
q = (1+i)n−1 = (1+0.08)75 -1 =113.28
i 0.08
Rate of depreciation for 30 years = (p × q )%
= 2.498 × 10−4 × 113.28
= 0.02829
Total depreciation in 30 years =(C – S)×0.02829
= 135000×0.02829
= 3819.15 Rs.

valuation
Difference between Depreciation and Obsolescence
53/121
Depreciation Obsolescence
1)This is the physical loss in the value of the
property due to wear & tear, decay etc.
amount for the depreciation.
1)The loss in the value of the property is due
to change of design, fashion, in structure of
the other, change of utility,
2) Depreciation depends on its original
condition, quality of maintenance and mode
of use.
2) Obsolescence depends on normal
progress in the arts, inadequacy to present
or growing needs etc.
3) This is variable according to the age of the
property. More the age, more will be the
amount for the depreciation.
3) This is not dependent on age of the
building. A new building may suffer in its
usual rent due to obsolescence.
4) There are different methods by which the
amount of depreciation can be calculated
4) At present there is no method of
calculation of obsolescence.

12/4/2020 54/21
உன் உயரம் உன்னைவிட உயரமே
சென்றனடயும் வனர உனை திைமுமே
நீ வலியில் நடப்பது தனடயமே
விட்டு விலகும் சநொடி சிறு ேரணமே
தயங்கிடத் தயங்கு முன்வந்து இறங்கபுயசலை இயங்கு
இறுதிச்சுற்று வனர இதயம் உருக்கினவ.
- Vivek
Happy Learning

12/4/2020
Valuation of Building
Valuation of building depends on-
 Type of building
 Its structure and durability,
 On the situation,
 Size,
 Shape,
 Width of road way,
 Quality of material used in the construction and
 Present day price of material.
It also depend on the locality if it is in market area having high value
then the residential area.
 And depending on the specialties in the building like sewer, water
supply, and electricity etc.

 The value of the building is determined on working out its cost of
construction at present day rate and allowing a suitable depreciation.
 The age of the building is generally obtained from record if available or
by enquires or from visual inspection.
Present day cost may be determined by the following methods
1. Cost from record
2. Cost by detailed measurements
3. Cost by plinth area basis
56/121

12/4/2020
1. Cost from record
Cost of construction may be determined from the estimate, from the bill
of quantities, from record at present rate.
If the actual cost of the construction is known, this may increase or
decrease according to the percentage rise or fall in the rates which may be
obtained from the public work department (PWD) schedule of rates.
2. Cost by detailed measurements
If record is not available, the cost of construction may be calculated by
preparing the bill of quantities of various items of works by detailed
measurements at the site and taken the rate for each item as prevalent in
the locality or as current PWD schedule of rates.

3. Cost by plinth area basis
The above methods are lengthy, a simple method is to calculate the cost
on plinth area basis.
The plinth area of the building as measured and the present day plinth
area rate of similar building in the locality is obtained by enquiries and
then the cost is calculated.
Determination of depreciation
After deciding the cost of the building or structure by any one of the
above method it is necessary to allow a suitable depreciation on the cost.
 The depreciation depends on the ultimate use of the building, the present
age of the building, nature of maintenance etc.
58/121

12/4/2020
Depreciation increases with the life.
For a building whose life is considered as 80 years, if well maintained
the following may be reasonable depreciation.
The balance 10% represents the net scrap value on dismantling at the end of
utility period.
Depreciation per year Total Depreciation
0 to 5 yrs - Nil
5 to 10 yrs @ ½ % 2.5%
10 to 20 yrs @ ¾ % 7.5%
20 to 40 yrs @ 1 % 20%
40 to 80 yrs @ 1 ½ % 60 %
Total 90%

Valuation Methods
1. Rental method of valuation
2. Direct comparison with the capital value
3. Valuation based on profit
4. Valuation based on cost
5. Development method of valuation
6. Depreciation method of valuation
In this method, the net income by way of rent is found out by deducting
all outgoings 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 Y.P gives the capitalized value or valuation
of the property.
60/121

12/4/2020
Valuation Methods
This method is applicable when the rent is known or probable rent is
determined by enquiries.
2. Direct comparison with the capital value
This method may be adopted when the rental value is not available from
the property concerned, but there are evidence 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 the similar property in the locality.
This method of valuation is suitable for buildings like hotels, cinema
theatres etc. for which the capitalized value depends on the profit.

Valuation Methods
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. In such case
the valuation may work out to be too high in comparison with the cost of
construction.
4. Valuation based on cost
In this method the actual cost incurred in construction 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.
62/121

12/4/2020
Valuation Methods
5. Development method of valuation
This method is used to evaluate such property where there is a
development potential, so that the value of the property after
development will be increased more than the expenditure incurred.
 For example, a large portion of land can be divided into small plots and
developed fully so as to provide plots of land for a residential Colony or a
large complex of multi-storied buildings, housing ownership flats in a Co-
operative Housing Society.

12/4/2020
Valuation Methods
.
6. Depreciation method of valuation
The depreciated value of the property on the present day rates 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.
64/121

12/4/2020
Valuation Methods
Value of rd
Sl.No Life of Building Rd value
1 75-100 1
2 50-75 1.3
3 25-50 2
4 20-25 4
5 < = 20 5

12/4/2020
Valuation Methods
.
Problem 8
A building is situated by the side of a main road of Chennai city on a
land of 500 sq m. the built up portion is 20 m ×15 m. the building is
first class type and provided with water supply, sanitary and electrical
fittings, and the age of the building is 30 years. Workout the valuation
of the property.
Solution
Plinth area of the building= 20 ×15 = 300 sq m.
Assuming plinth area rate as Rs.200 per sq m including water supply,
sanitary and electrical fittings.
Cost of building = 300 × 200 = Rs.60,000
Assume life of building as 100 years.
66/121

12/4/2020
Valuation Methods
D = P[(100 – rd)/100]n
= 60000 100 - 1 30
100
= 44,280.
Cost of land assuming Rs.60 per sqm = 500 × 60 = Rs. 30,000.
Total valuation of property = 44,280 + 30,000
Total valuation of property = Rs. 74,280.

HAPPY LEARNING
68/121

12/4/2020
Valuation
.
Mortgage
 A owner can borrow money against the security of his property, and for
that purpose he is required to grant an interest to the party advancing the
loan.
 The loan is required to be returned in specified time.
Mortgagor – the person who takes the loan
Mortgagee – the person who advances the loan
Mortgage deed – the relevant document for the mortgage transaction .
Equity of redemption - When the loan is fully repaid together with
interest the mortgagor has got the right to free his property from the
mortgagee.
69/121

12/4/2020
Valuation
Mortgage
The amount of loan will depend on the valuation of the property, usually 50
to 70 percent of the valuation is advanced as loan.
The interest should be paid by regular instalments and the loan also be repaid
by regular instalments spread over the specified period of the mortgage.
If the mortgagor fails to pay the instalment of loan as per condition of the
mortgage deed, the mortgage can take over possession of the property and sell
it to recover the amount of loan, the interest and other expenses.

12/4/2020
Valuation
.
Freehold property
It means that the owner is in absolute possession of the property, and the
owner can utilize the same in any manner the way he wants (within the
limits of rules and regulations of the government & local authorities).
The owner can use the property by himself or may grant leases for a short
period or any period.
Leasehold property
It indicates the physical possession of the property and the use of it may
be allowed by the original owner as per lease document.
Lease holder or lessee – the person who takes lease
Lessor – the person who grants lease
71/121

12/4/2020
Valuation
Types of Lease
1. Building lease 2. Sub lease 3.Perpetual lease
4.Life lease 5.Occupation lease
Building lease
 Freehold is want to give the open plot for lease to some person lessee on
an agreement of premium or ground rent or a combination of a both.
 The lease holder can erect a building there up to a specified amount in a
specified period and he maintains the property and earn through that
property.
 These types of leases are generally grand for a long period of 50, 99, 999
years.
 At the termination of the lease, the lessor becomes the full owner of the
land.

12/4/2020
Valuation
.
Occupation lease
 In this case the building or the structure is built by the owner and the
built up property is given on lease for the purpose of occupation for a
specified period on payment of certain amount of annual rent.
 Occupational lease may be for residential, commercial ,factory, office, etc.
lease period will depends on the purpose for which the structure or
building has been constructed.
Sub Lease : Leaseholder may grant a sub lease to other person depending
on the terms & conditions mentioned in the original lease.
Life Lease: Lease is granted for duration of life of the leaseholder.
Perpetual Lease: Endless years and endless time.
73/121

12/4/2020
Valuation
Easement
Easement are the rights and privilege which the owner of a property enjoys
through or over the property of another.
Dominant owner – the person who enjoys the easements over a property.
Servient owner – the owner over whose property the easements are
enjoyed.
The following are some of the main easements:
1. Right to use light and air from and over the property of the adjoining
owner’s land.
2. Right to access from the adjoining owner’s land.
3. Right to run and maintain water and drainage pipes through the
neighbour's land.
4. Right of flow of rain water over other’s land.
5. Right of support for a building from the adjoining owner’s land.

Valuation of Land
Valuation of land is done by one of the three methods as and where
applicable.
1. Comparative method
2. Belting method
3. Hypothetical building schemes
 This is simplest and most direct method.
The method is based on instances of other sales with dates of open
comparative like lands in the neighbourhood.
So there are two main factors on witch this method is based
1) Sale prices and
2) Similar neighbourhood lands.
75/121

12/4/2020
Valuation Methods
Sale prices should be recent.
 The method is based on the comparison of like to like.
Properties may be similar but each property is unique so they can never
be like. But we can assess by using the following factors.
Situation: position of the land means locality, availability, type of
people, nearby schools, market, office, hospital etc.
 Size
 Return Frontage
 Front road width
 Nature of soil

Valuation Methods
2. Hypothetical building scheme
In this system value of a vacant plot of land is estimated by capitalizing
the assumed rent that can be obtained from the building, if erected on the
land after developing the same, and then deducting the cost of development
and building.
Procedure
 From the total area of land find out the
permissible covered area = total area – one third area of land as required
for compulsory open space under municipal by laws.
 Find out rentable area = total covered area – 20% for area of wall and
wastes.
 Calculate net rent per month = gross rent – outgoings. Usually consider total
outgoings be 30% of the gross rent.
77/121

12/4/2020
Valuation Methods
 Find out years purchase for perpetual (changing) with interest on
capital at the current bank deposit rate (should be minimum 10%).
Capitalize the net rent by multiplying the year’s purchase deferred for
the development and construction period.
 Consider the current plinth area and find out the cost of the building
from the total covered area.
For storied buildings the covered area shall be worked out all the
stories.
 Work out the development cost of land.( if required) Find the total cost
of building and development cost of land.
 Deduct the total cost of building and development from the deferred
rental value of the building to find the cost of land.

Valuation Methods
3. Belting method of valuation
 It is based on the road frontage. Frontage land has a greater value than
back land.
So in order to find out the realistic value of land the entire plot is divided
into a number of convenient strips by lines parallel to the centre line of the
road.
 Each such type of land is known as belt.
 Then a relationship regarding the value and the depth of each belt to the
front belt is fixed up.
Then calculate the valves of each belt in terms of first belt. Then summing
up the value of each belt.
 Normally the plot of land is divided in to three belts.
79/121

12/4/2020
Valuation Methods
The depth of second belt is taken as 1 ½ times that of front belt and the
depth of the third belt at 1 ½ times the depth of the second belt or depth
remaining after second belt is considered as the depth of third belt.
Value of recessed land not lying within the perpendicular drawn on
belting lines from the end point is valued at three fourth value in that
particular belt of land.
 Value of the front belt is maximum.
The second belt is valued at 2/3 rate of the first belt and third belt value
at half the rate of the first belt.

Valuation Methods
3. Belting method of valuation
81/121

12/4/2020
Valuation Methods
Fixation of Rent
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.

12/4/2020
Valuation
.
 Net return is worked out based on 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.
83/121

12/4/2020
Valuation
Problem 9
In a plot of land costing Rs.20,000 a building has been newly
constructed as a total cost of Rs.80,000 including sanitary, water
supply works and electrical installations etc. the building consists of
four flats for four tenants. The owner expects 8 percent return on the
cost of construction and 5 percent return on the cost of land. Calculate
the standard rent for each flat of the building assuming:-
i. The life of the building as 60 years and sinking fund will be
created on 4% interest basis.
ii. Annual repairs cost at 1% of the cost of construction.
iii. Other outgoings including taxes at 30% of the net return on the
building.

12/4/2020
Valuation
.
Solution
Net return required on land per annum = 20,000 × 5 = Rs.1000
100
Net return required on building per annum = 80000 × 8 = Rs.6400
100
Total net return per annum = Rs. 7400
Outgoings
i) Annual sinking fund instalment, I = Si
(1+ i)n- 1
S = 80000 × 90 = 72000
100
I = 72000× 0.04 = Rs. 304.50
(1+0.04)60 - 1
85/121

12/4/2020
Valuation
ii) Annual repairs cost at 1% of the cost of construction.
= 80000 × 1 = Rs. 800
100
iii) Other outgoings including taxes at 30% of the net return on the building.
= 6400 × 30 = Rs. 1920
100
Therefore, total outgoings = 304.50 + 800 + 1920 = Rs. 3024.50
Gross rent per annum = net rent + outgoings
= 7400 + 3024.50
= Rs. 10424.50
Gross rent per month = 10424.50 / 12 = Rs. 868.70
Gross rent for one flat = 868.70 / 4 = Rs.217.175
Standard Rent = Rs. 217.715 /-

Thank You
HAPPY LEARNING
87/18

12/4/2020
Valuation
.
Fixation of rent for government building
Rent statement- For every government residential building the rent, the
occupant has to pay is normally calculated on a statement .
The rent statement is prepared under following conditions,
i) When a residential building is newly constructed.
ii) When a residential building is acquired by purchase, lease or transfer.
iii) When there are additions and alternations to a residential building,
costing beyond certain limit fixed by the government
iv) When whole or part of a building or other non residential building is to
be used for residential purposes.
88/121

12/4/2020
Valuation
The rent is reassessed normally every fifth year even though there is no
additions and alternations to the building.
 Revised rent statement – If there is any additions and alternations to
the building, costing more than the limit fixed by the government
concerned, the rent is reassessed.
Fixation and calculation of rent
 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 land is not included in the capital cost.

12/4/2020
Valuation
.
 The standard rent is fixed as per rules framed by the government, which
differs to some extent from state to state.
The standard rent is calculated by the following two methods and the
lesser amount is taken as standard rent:
Method – I : According to this method,
Annual standard rent = 6% per annum of total capital cost.
Method – II : According to this method,
Standard rent is calculated at 6% interest on the capital cost and in
addition the expenditure on annual and special maintenance and repairs
and municipal and other taxes are added.
For annual repairs = 1 ½ % of cost of building
Water supply works = 1%
Sanitary works = 1%
Electrical installations = 1 ½%
90/121

12/4/2020
Valuation
For quadrennial & special repairs,
For annual repairs = 0.6% of cost of building
Water supply works = 3 ½ %
Sanitary works = 3 ½ %
Electrical installations = 3 ½%
 Municipal and property taxes are based on % basis of rent as per rules of
municipal board or government.
 Rent fixed by the above method is maximum rent or standard rent for
building.
Method III :
 But for government official occupying a government building has to pay
1/ 10 of salary as rent. In addition has to pay water tax, normal as well as
excess sewerage charges and EB bill.
 House tax, maintenance cost property tax paid by government or owner.

12/4/2020
Valuation
.
Problem 10
Calculate the standard rent of a government residential building
newly constructed from the following data –
i) Cost of land = Rs. 10,000
ii) Cost of construction of the building = Rs.40,000
iii) Cost of roads within the compound, and fencing = Rs. 2000
iv) Cost of sanitary and water supply works = 8% cost of building.
v) Cost of electric installation including fans= 10% of cost of
building.
vi) Municipal house tax = Rs.400 per annum
vii) Water tax = Rs. 250 per annum
viii)Property tax = Rs. 140 per annum
92/121

12/4/2020
Valuation
Solution
Total capital cost
cost of building = Rs. 40,000
Cost of roads and fencing = Rs. 2000
Cost of sanitary & water supply works = 8 × 40,000 = Rs. 3200
100
Cost of electric installations = 10 ×40,000 =Rs. 4000
100
Total Capital Cost = Rs.49,200
Note - Cost of land is not included.
Method I:
Annual Standard Rent = 6 ×49200
100
Annual Standard Rent = Rs. 2952/- per annum.

12/4/2020
Valuation
.
Method II
Interest on total capital cost @ 6% = 6 × 49200 = Rs. 2952
100
For annual repairs = 1 ½% of cost of building = 1.5 × 40,000 = Rs.630
100
Sanitary & Water supply works = 1% of cost of sanitary and sanitary works.
= 1 × 3200 = Rs.32
100
Electrical installations = 1 ½% of cost of electric installations
= 1.5 × 4000 = Rs. 60
100
94/121

12/4/2020
Valuation
Special Repairs
For annual repairs = 0.6% of cost of building = 0.6 × 40,000 = Rs. 252
100
Sanitary &Water supply works = 3 ½ % of cost of sanitary and water supply
works.
= 3.5 ×3200 = Rs. 112
100
Electrical installations = 3 ½% of cost of electrical installation
= 3.5 × 4000 = Rs. 140
100
Municipal house tax = Rs. 400
Property tax = Rs.140
Total Standard Rent = Rs. 4718

12/4/2020
Valuation
.
Water tax has not been added as this will be paid by the occupant.
By comparing method I and method II , standard rent will be taken as the
lesser rent.
standard rent per annum = Rs. 2952
Standard rent per month = Rs. 2952 = Rs.246
12
Standard Rent Per Month = Rs. 246 /-
Escalation :
 It is the provision in the cost estimate for increases in the cost of
equipment, material, labor, etc., due to continuing price changes over the
time.
Escalation is used to estimate the future cost of a project or to bring
historical costs to the present.
96/121

12/4/2020
Valuation
Escalation Relationships
Escalation in cost estimating has two main uses:
 To convert historical costs to current costs (historical escalation index).
 To escalate current costs into the future (predictive escalation index) for
planning and budgeting.
 The historical escalation index is used to bring the historical cost to the
present and then a predictive escalation index is used to move the cost to
the future.

Happy Learning
Every person gets negative Things, They Learn From those Negative
things and You become A positive Person”
- Kapil Dev
98
98/20

Valuation - Estimation, Costing and Valuation Engineering

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Valuation - Estimation, Costing and Valuation Engineering

Similar to Valuation - Estimation, Costing and Valuation Engineering (20)

More from Shanmugasundaram N

More from Shanmugasundaram N (20)

Recently uploaded

Recently uploaded (20)

Valuation - Estimation, Costing and Valuation Engineering