Property Valuation Essentials

Property Valuation

• Valuation: The analytical process of determining the current market value of a company, property, or asset.
• Valuation is essential for: Buying or selling property, taxation (municipal, wealth, property), rent fixation, security of loans/mortgages, and compulsory acquisition.
• Valuation Factors: Location, accessibility, type of structure, supply and demand, age and condition, amenities and services, economy, property characteristics, surrounding infrastructure, market conditions, interest rates, and renovation potential.
• Property Types: Movable (money, gold, bullion, jewelry, personal belongings) and immovable (land, with or without buildings, and other improvements permanently attached to the land).
• Price vs. Cost vs. Value: Price is the amount charged by a seller; cost is the total amount spent on inputs; value is the benefit derived from a product or service. Price = Cost + Profit. The marketplace determines value based on features, specifications, and benefits. Value may be higher or lower than the actual cost.
• Cost Elements: Material, labor, and overheads. Costs are fixed (remain the same regardless of production) or variable (vary with production). Examples of fixed costs include equipment depreciation and permanent employee salaries. Examples of variable costs include raw materials, labor, equipment fuel, shipping, and consumables.

Types of Value

• Scrap Value: Value of reusable materials.
• Salvage Value: Value of intact usable components.
• Market Value: Price a willing buyer would pay in an open market, considering location, demand, and current trends.
• Monopoly Value: Higher price for properties with unique advantages (e.g., near airports, limited availability).
• Breakup Value: Value of individual assets after a unit is closed.
• Reported/Appraised Value: Estimated price determined after scrutinizing documents &site inspection.
• Speculative Value: Value based on the expectation of future price increase.

Valuation Methods

• Land Valuation:

  • Comparative Method: Valuing land by comparing to similar, recently sold properties in the same area, considering factors such as location, plot size, frontage, and soil conditions.
  • Abstractive Method: Estimating land value when comparable sales data is limited. Calculated by considering income from a similar property.
  • Belting Method: Used for deep plots, dividing the land into zones, assessing each zone individually for value and proportionally adjusting for depth variations.

• Building Valuation

  • Rental Method: Calculating capitalized value based on typical rental income, outgoings, and a suitable interest rate.
  • Direct Comparison Method: Comparing capital values of similar properties. Properties should be similar in size, character, conditions and duration of lease.
  • Contractor's Method (Cost Method): Determining building value by estimating land and construction cost, less depreciation. Replacement costs, such as the plinth area (ground area) rate, cubic content rate, and item rate, may be used.
  • Profit Method: Estimating income, deducting expenses, subtracting tenant's share of profits and calculating the landlord's share of rent, which represents the value.
  • Residual Method: Calculating remaining value from the difference between the estimated gross development value and development costs and profit

Depreciation

• Depreciation: Loss in value of a building or equipment through use, wear, and tear.
• Methods: Straight-line, declining balance, sum-of-the-years' digits, age-life, cost-to-cost.

Sinking Fund

• Definition: Funds accumulated over time from the gross rent to recover the cost of replacement of the building. Sinking fund is calculated considering the life of the building and the interest rate on deposits made in the bank account or securities.
• Calculation: A regular annual contribution from the gross rent is made to build funds. Rate of interest and useful life of the building are factors.

Year's Purchase

• Definition: Measures the potential return on investment. Calculated based on net operating income (NOI) and current market value of the property.
• Formula: Year's Purchase(YP) = 1/Capitalization Rate.