Property Valuation Updated PDF

Valuation Is there any difference between Price, Cost and Value?  Cost  The cost can be defined as the total amount spent on the inputs like land, labour, capital, machinery, material, etc. with an aim of producing the product or supplying the se...

Valuation Is there any difference between Price, Cost and Value?  Cost  The cost can be defined as the total amount spent on the inputs like land, labour, capital, machinery, material, etc. with an aim of producing the product or supplying the services.  It can be anything which adds to the expense of product or service manufactured or supplied by the firm.  In simple terms, cost implies the financial worth of the sacrifice made, to obtain the goods or services. It is incurred for present or future benefits.  The basic elements of cost are: Material, Labour and Overheads.  At the time of setting up a price, it is necessary to identify and compute all the costs, as they affect the business profitability to a great extent. Further, costs are divided into fixed costs and variable costs:  Fixed Cost: Costs, which remain the same irrespective of the number of units produced, it is called a fixed cost. Example: Construction Equipment Depreciation, Salaries of Permanent Employees, Site Office Rent, Insurance premiums etc.  Variable Cost: The kind of costs, which varies with the number of units produced is called variable cost. For Example Raw material, Labour, Fuel Costs for Equipment, Shipping cost, Consumables etc.  Price  Price is the consideration given in return for acquiring a good or service.  In a commercial transaction, price refers to the amount charged by the seller from the buyer, in exchange for any product or service, which includes cost and profit.  It must be noted that it is referred by different names when used in different contexts, i.e. when the subject matter of the commercial transaction is a good it is called as ‘price’, but when the subject matter is a ‘service’, it can be known as:  Fees: For the supply of professional services.  Premium: In the case of insurance.  Rent: For the use of place or machinery.  Fare: In the case of transportation. Price = Cost + Profit  Value  Value can be described as the benefit derived by the customer from the product or service. In clearer terms, value is what a customer perceives the product or service is worth to them.  The value is decided by the marketplace on the basis of the benefits received from the combination of features, or specifications, present in a particular product.  The combination of features covers material or functional characteristics, product reliability, user-friendliness, appearance, customer support and technical assistance, etc.  The value may be more or less than the actual cost of construction / manufacturing of that commodity.  Valuation  Valuation is the analytical process of determining the present market value of a company, property or asset.  Valuation is the art of scientifically determining the price that a willing buyer would pay to a willing seller for transfer of a thing.  By valuation the present value of a property is determined. Present value is important because it allows investors and businesses to judge whether some future outcome will be worth making the investment today.  It is also important in choosing among potential investments, especially if they are expected to pay off at different times in the future.  Valuation  The present value of property may be decided by its selling price, or income or rent it may fetch.  The value of a property depends on its structure, life, maintenance, location, bank interest, legal control etc.  The value also depends on supply on demand and the purpose for which valuation is required.  Assets/ properties may be divided into: –Movable Properties: Money, gold and silver, bullion, jewelry and personal belongings etc. –Immovable Properties: Land with or without building, and other improvements. Permanently attached to the land.  Purpose of Valuation ✓ When it is required to buy or sell a property, its valuation is required.  Buying or Selling Property: ✓ To assess the tax of a property, its valuation is required.  Taxation: ✓ Taxes may be municipal tax, wealth tax, Property tax etc. and all the taxes are fixed on the valuation of the property. ✓ In order to determine the rent of a property, valuation is required. Rent is usually fixed on the certain  Rent Fixation: percentage of the amount of valuation which is 6% to 10% of valuation. ✓ When loans are taken against the security of the property, its valuation is required.  Security of Loans or Mortgage: ✓ Whenever a property is acquired by law; compensation is paid to the owner. To determine the amount  Compulsory Acquisition: of compensation, valuation of the property is required.  Valuation of a property is also required for Insurance, speculations etc.  Factors Affecting Valuation of Property  Location & Accessibility  Type of Structure  Supply and demand  Age and condition  Amenities and services available, Space etc.  Economy  Property characteristics  Surrounding infrastructure  Market conditions  Interest rates  Renovation potential Valuation - Form O1 O-1 Form.pdf Valuation - Form O2 O-2 Form.pdf NGDRS : National Generic Document Registration System UM-PropertyValuation.pdf https://ngdrs.gov.in/NGDRS_Website/valuation.php https://easr.igrmaharashtra.gov.in/eASRCommon.aspx? hDistName=Pune  Types of Value Example : Residential Building in Bengaluru, India Book Building value: It Details: is the original Location: Bengaluru, Karnataka cost of an asset after providing the depreciation for the period of use. It is theType: Property amount shown inresidential 2-bedroom the booksflat of account. Built in: 2010 Original Purchase Price (Cost): ₹50,00,000 (₹50 Lakh) Depreciation Method: Straight-line depreciation at 2% per year. 1. Book Value Calculation: Market The Value: book value It is the by is calculated value of the property subtracting onedepreciation accumulated can get at from particular timepurchase the original in open price market after it of the has been property. Forkept this for sale. the flat was purchased in 2010, and we will calculate the depreciation for 2024 (14 years). example, Depreciation Calculation: Depreciation per year = ₹50,00,000 × 2% = ₹1,00,000. Total Depreciation (over 14 years) = ₹1,00,000 × 14 = ₹14,00,000. Book Value = Original Price − Total Depreciation = ₹50,00,000 − ₹14,00,000 = ₹36,00,000. So, the book value of the flat is ₹36,00,000 as of 2024. 2. Market Value Calculation: The market value reflects the price that a buyer would pay in the open market, considering factors like location, demand, the condition of the property, and current market trends. In Bengaluru, the real estate market has been booming in recent years, especially in certain neighborhoods, leading to price appreciation. For this example, let’s assume the property is located in a sought-after area of Bengaluru, where residential prices have increased due to infrastructural development (new metro lines, shopping complexes, tech parks). Based on recent market trends, properties in this area have appreciated by around 8% annually over the past few years. Market Value Calculation (Assuming 8% annual appreciation):  Types of Value Example : Residential Building in an Urban Area (Mumbai, India) Property: A 3-storey residential building located in a densely populated urban area of Mumbai, constructed in the 1980s. The building is no longer in use and is slated for demolition. 1. Scrap Value (materials that can be reused or sold for raw materials): Materials: The building has a concrete structure with steel reinforcements, brick masonry, wood finishes, and metal fixtures (doors, Scrap/ junk value: It is the value of machinery or equipment when it becomes completely windows, etc.). Recyclable Materials: useless except for sale as junk or scrap metal. In case of a property (buildings), the expected value Steel Reinforcements: Steel has a high scrap value and can be sold to scrap dealers. of materials obtained from demolition will represent the scrap/ break up value/ demolition value. Bricks: Bricks in reasonable condition can be reused in new construction or sold for repurposing. Wood: Timber from doors, window frames, and furniture may have resale value if it's in good condition. Salvage value: It is the value expected to be realized on sale of machinery or equipment when its Copper Wiring: Wiring and electrical equipment containing copper can be recycled for cash. Estimated Scrap Value: useful span of life is over, but has not become completely useless. Steel (reinforcing bars and structural components): ₹15,000 - ₹20,000 (depending on weight and quality). Reusable bricks: ₹5,000 - ₹10,000 (depending on the quantity and condition). Timber: ₹5,000 - ₹8,000 (depending on the type of wood and condition). Copper wiring and electrical materials: ₹3,000 - ₹5,000. Total Estimated Scrap Value: ₹28,000 - ₹43,000. 2. Salvage Value (value of elements that can be reused directly or sold intact): Reusability: Doors, Windows, and Frames: If the wooden doors and window frames are in good condition, they could be reused in other buildings. These items may be sold to construction companies or second-hand building material dealers. Floor Tiles, Bathroom Fixtures, and Fittings: High-quality floor tiles, sanitary fittings, sinks, taps, and bathtubs could be salvaged and sold for reuse. Electrical Fixtures: Light fixtures, ceiling fans, and other electrical fittings might have a market for resale. Furniture: If any furniture or fixtures are left behind, these could also be resold, especially if they are antique or made of high-quality materials. Estimated Salvage Value: Doors and Windows: ₹10,000 - ₹15,000 (depending on quantity and quality). Flooring Tiles: ₹7,000 - ₹12,000. Bathroom Fixtures: ₹5,000 - ₹10,000. Furniture: ₹5,000 - ₹8,000 (if any usable items are found).  Types of Value Example : The "Chhatrapati Shivaji Maharaj International Airport" (Mumbai) and Distress value: Value of a property offered for immediate sale by its owner, and fetches lower value than Adjacent Commercial Properties market value Property is called Type: distress value. Commercial This value Buildings is developed Adjacent dueAirport to an to fear of wars, riots, earthquakes, financial difficulties ofMumbai, Location: seller, intension to favour the purchaser etc. Maharashtra Building Type: Commercial office buildings, retail spaces, or hotels near Chhatrapati Shivaji Maharaj International Airport (CSMIA) in Mumbai, India. Monopoly value: It is a special value demanded due to its unusual and peculiar advantages over the existing Monopoly Value Overview: -similar properties Unique Location in the vicinity. Cases where the property possesses advantages over other properties due to -size, shape, Importance Strategic frontage, location, the owner may demand for a fancy price more than the market value. - Limited Availability of Land - Exclusive Zoning Rights Replacement value: It is the cost of construction at current prices, of a building having utility equivalent to the building valued but built Monopoly Value Calculation: with modern materials. Market Value of Comparable Properties: Properties near airports often command higher Sentimental prices due tovalue: It is the value the monopoly of the effect of property, being in to the buyer a prime or seller location as limited with the casecompetition. may be, who For determines example, office spaces price on sentimental nearrather grounds the airport in Mumbai than considering can go market for ₹250 forces. to ₹350 Sometimes someper sq. ft. per sentiments or feelings month, depending on the location and the quality of the building. Commercial properties in other of owner are attached to the property due to which he will not be ready to part with his property even when a parts of the city may only fetch ₹100 to ₹150 per sq. ft. This premium of ₹150 to ₹200 per fancyft.price sq. is offered is due to thefor the property. monopoly valueSuch sentimental of the value property’s has no relation with the market value. location. Example of a High-End Commercial Building: A commercial property near the airport with 10,000 sq. ft. of office space can potentially command a monthly rent of ₹3,000,000 to  Types of Value Breakup value: When any established unit is closed down and sale of each individual assets is envisaged separately, it is termed as breakup value. It is generally exercised for manufacturing industry. Mortgage value: It is an estimate of value of a property offered as a security by a borrower to the bank/ financial institution for loan advance. Hope value: Sometimes the owners of property expect some likely changes in Government or Municipal policies and hence expect value of the property to rise in the near future which is called as hope value. Reported / Appraised value: It is an estimated price of the asset as finally arrived at by a valuer after full scrutiny of the documents, physical survey of the site, inspection, enquiries etc. Speculative value: It is the value of the property to the speculator who invests in the property with a sole motive of selling at a profit within a short period of time. The value thus presumed by the speculator for the future is the speculative value.  Concept of Free & Lease Hold Property Free Hold Property  Absolute possession of property is with owner.  He may utilize as per his like, following the Government rules & regulations.  Property can be used by himself, can lease, or tenancies for any period. Lease Hold Property  Physical possession of property is with the lessee (lease holder) as per the terms & conditions of lease document for a definite period.  Owner is lessor.  Lease holder can’t sell, rent the property without the consent of owner.  Many of the luxury resorts in North Goa (like those near Candolim or Calangute) are built on leasehold land, where the developers or resort owners lease the land from the state government or private entities.  Concept of Year’s Purchase The capitalization rate is a percentage that reflects the expected rate of return on an investment property, based on its net operating income (NOI) and current market value or sale price. It measures the potential return on an investment Cap Rate Formula: Where: NOI (Net Operating Income) is the annual income the property generates after operating expenses (but before tax considerations). Market Value (or Sale Price) is the price at which the property is being bought or sold. Prime commercial properties in central locations may have a higher capitalization rate (e.g., 5-6%). Residential properties in suburban or less prime areas may have a lower capitalization rate (e.g., 2-4%). Years' Purchase (YP) represents the number of years of income that would need to be accumulated to equal the capitalized value of the property. The YP multiplier can be calculated from the cap rate, and it reflects the present value of all future income (net operating income) generated by the property. The method is primarily used in real estate valuation, property investment analysis, and business valuations, where it helps investors determine how much they should pay for an asset (like property) based on its expected future income. YP = 1 / Cap Rate  Concept of Year’s Purchase The formula to calculate the value of a property is: Value of Property = Annual Income × Year’s Purchase (YP) A commercial property in Mumbai (a prime commercial area) generates ₹6,00,000 per year in rental income. The capitalization rate (Cap Rate) for commercial properties in Mumbai is around 6% (or 0.06). Calculate the value of the property based on its annual rental income. Step 1: Calculate Year’s Purchase (YP) We will first calculate Year's Purchase (YP) using the capitalization rate. YP = 1 / Cap Rate YP = 1 / 0.06 = 16.67 Step 2: Calculate the Value of the Property Value of Property = Annual Income × YP = 6,00,000 × 16.67 = 1,00,02,000 The YP of 16.67 implies that it would take 16.67 years of rental income to recoup the purchase price of ₹1 crore. The investor should expect the property to generate a 6% annual return on the invested capital (i.e., ₹6,00,000 income for a ₹1 crore investment).  Concept of Sinking Fund The sinking fund may be defined as the amount deposited every year from the gross rent of the building at compound interest in a bank or securities, so that the owner recovers the pre-determined value to meet the cost of replacement of the building. Thus there will be regular annual deposit in the form of sinking fund for depreciation and there shall be accumulation of interest on such deposits. The sinking fund essentially sets aside a specific amount of money annually in order to ensure that there will be enough funds available when the asset needs to be replaced or repaired. A sinking fund is typically used to account for the future replacement costs or maintenance costs associated with the property. It’s particularly relevant for long-term investments where the property will require significant repairs or replacements over time (e.g., roof repairs, HVAC replacements, major refurbishments).  Sinking Fund Such a provision is made by depositing every year certain small amount of the gross rent in nationalized banks or government securities and is known as ‘Sinking Fund installment’. At the end of the useful life of the building the owner is in a position to receive the entire value of his building. The sinking fund to be calculated depends upon the following factors:  Life of building  Rate of interest on bank deposits or securities  Scrap vale of the building which is assumed as 0.1 times the cost of construction, at the end of its useful life.  Sinking Fund Let, Sinking fund instalment = Si Life of building in years = n Rate of interest on sinking fund = i Total sinking fund to be accumulated in n years = S.F. Sinking Fund Instalment:  Sinking Fund A real estate investor owns a residential building. The building is expected to require a major refurbishment or replacement of key systems (e.g., plumbing, roof etc.) after 20 years. The estimated cost of the refurbishment after 20 years is ₹ 50,00,000. The investor expects to earn an 8% annual return on the funds set aside in the sinking fund. Step 1: Determine the Annual Contribution to the Sinking Fund Using the formula for the annual contribution: So, the investor needs to contribute approximately ₹1,09,029 annually to the sinking fund to ensure they have ₹50,00,000 available for the refurbishment after 20 years.  Depreciation Depreciation is the loss in the value of the property, machinery or equipment due to its use, life, wear, tear, decay and obsolescence. This is an assessment of the physical wear and tear of the building or property and is naturally dependent on its original condition, quality of maintenance and mode of use. Thus the value of a building or property (but not land) decreases gradually up to the utility period due to depreciation. The concept of depreciation is involved when dealing with decreasing values of long term fixed assets over its useful life. The value of assets after depreciation will be reported on balance sheet as book value: Book Value = the original cost of asset – the accumulated depreciation Common Methods of Calculating Depreciation in Valuation 1.Straight-Line Method 2.Declining Balance Method (Reducing Balance) 3.Sum-of-the-Years’-Digits Method 4.Age-Life Method 5.Economic Life Method 6.Cost-to-Cost Method Methods of Estimating the Value of A Property Land and Building Method Land Building Valuation Valuation Comparison Rental Method Method Direct comparison of Capital value Abstractive Profit Method method Cost Method Belting Residual or Method Development Method Depreciation Method Market value of land depends upon many factors 1. Location 2. Size of plot 3. Shape of plot 4. Frontage and depth 5. Return frontage 6. Width of road  Land Valuation 1. Comparative Method Find Out Consideration Actually Paid For Other Similar Properties In The Same Locality And Three To Five Years Prior To The Date Of Valuation. Factors To Be Taken Into Consideration: 1] Situation 2] Size 3] Shape 4] Frontage and depth 5] Return Frontage 6] level 7] Nature of soil 8] Land locked property 9] Restrictions on development 10] Encumbrances 11) Miscellaneous advantages  Land Valuation COMPARATIVE METHOD. The The evidence TheMarket The Market Transactions of similar properties Comparative COMPARATIVE Shouldbe Should be Valuation VALUATION fairly stable Fairly stable IN the In the same area same area Underlying Frequent Frequent Economic Recent Records Transactions Factors should transactions Be studied  Land Valuation 2. Abstractive method When there is no information accessible about land transactions in the surrounding area, this approach becomes helpful. Steps: 1. Rent-earning nearby property is taken into account, and its capitalized value is calculated by multiplying its net income by the year's purchase, represented by C. 2. After calculating the approximate cost of replacing the aforementioned building and properly accounting for depreciation, a value S that represents the current cost of the building alone is obtained. 3. If A is the land's area, then the cost per unit area is equal to (C-S)/A. The difference C-S indicates the land's value. 4. The more the chosen land resembles the land being considered, the more accurate the land's valuation will be.  Land Valuation 3. Belting Method If the depth of the plot is more than the depth of the comparable plots in sales considered, this method is adopted to value the land. Used when the plot with less frontage and more depth Based on the principle, that the land value generally decreases as the plot depth increases This approach can be used on property larger than 1000 square meters with a road on one of the plot's smaller edges. The area of property that is inside the plot's boundaries yet forms an obtuse angle with the road line at the zero frontage point is known as recess land.  Land Valuation This method divides the plot of land under examination into various sections or zones, and instead of estimating an average rate of land, separate rates of land are estimated for each sector or zone. The land element is often separated into three belts. The first belt's depth close to the road has been appropriately adjusted. The second belt's depth is maintained at 50% more than the first belt's, and the third belt's depth is maintained at 50% greater than the second belt's. The belting approach is seen as an artificial method since road frontage or depth alone cannot be regarded as the only factors influencing the rate of open space. A suitable rate of land is evaluated and chosen for the first belt based on the size, form, location, and other criteria that affect the rate of land. Two-thirds of the first belt's rate is taken for the second belt, and half of the first belt's rate is taken for the third. The rate of recessed lands, or lands that are not between the perpendiculars from the road frontage, is one-fourth lower than its comparable values from the belt consideration if the plot has an irregular shape.  Land Valuation Belting Method ½ Value 3rd Belt Remaining Of 1st Belt Recess Land ¾ of 2nd Belt 2/3rd Value Value 2 nd 1.5 X Of 1st Belt Belt Recess Land Full Value ¾ of 1st Belt 1 Belt st X Value R O A D  Building Valuation 1. RENTAL METHOD OF VALUATION The fulfillment of the following conditions is essential for the application of method to determine the market value of the property 1. The property is let at a rent from which fair rent can be ascertained 2. The land should be fully developed by a building erected thereon 3. The rent has been proved and is likely to be maintained for years to come. Method: The gross income from the property from the consideration of its rental value is estimated The usual outgoings is worked out The net income is obtained. At a suitable interest rate the estimated value of the property is calculated YP is worked out The multiplication of YP and net income gives the capitalized value of property  Building Valuation 2. Direct comparison of capital value In certain cases there may be a very little evidence of the rental value upon which the analysis of the sales can be based for arriving at rate percent appropriate to type of property to be valued but there may be a lot of evidence of sale price of the similar properties. In such case the direct comparison of the one capital with another can be made. It has to be kept in mind that the properties being compared should be very similar in size and character and all advantages and disadvanta`ges of property are weight, length of terms and conditions of lease are also very similar other wise it may not give the correct value of the property.  Building Valuation 3. Contractor’s Method or Cost Method Method: 1] Estimate value of land in its existing use. 2] Estimate cost of construction of building. 3] Allow for depreciation on account of age, obsolesance etc. 4] Capital Value = Land value plus depreciated cost of building Methods to determine replacement cost of building:- 1. Plinth area rate. 2. Cubical content rate. 3. Item-rate.  Building Valuation Depreciation Depreciation is calculated for period of present life with due consideration to its future life and total life. Types of depreciation – Physical depreciation – Functional depreciation – Contingent depreciation Methods:- 1. Straight line method 2. Constant percentage method / Declining balance method 3. Sinking fund method 4. Quantity survey method  Building Valuation 5. Profit Method Profits made by an occupier determines the rent a tenant would be willing to pay for hiring the premises. Method. 1] Estimate the gross average receipts of the occupier. 2] Deduct the expenses incurred for earning those receipts. 3] Deduct the tenant’s share of reasonable profits, which include interest on his capital, remuneration of his services and compensation for his risk. 4] The residue will be the landlord’s share of rent. Note: Bear in mind that what is assessible is the property and not the trade. Building Valuation 6. Residual Method Assess Optimum Development For The Property. Estimate Gross Development Value [A]. Assess Cost Of Development [B]. Assess Developers Risk And Profit [C]. Residual Value= [A] – {[B] +[C]}. Cost of each item of infrastructure is estimated and Allowances made for each relevant factor which are deducted from sale value of small plots, carved out from larger plot. Cost of development will include:- 1. Building costs 2. Architects fees [% of cost of development] 3. Engineers fees 4. Other professional fees [% of proceeds of sell] 5. Advertising and legal fees Example: A freehold property having an area of 800m2 is jointly held by four brothers and it is fully developed. It consist of basement, ground floor, first floor, second floor and third floor. The structure is being designed as RCC framed and used as a college building. The monthly rent is RS. 8000/-. The usual outgoings may be taken as 20% of gross annual rent. Work out the share of each owner in property. Solution: Gros annual rent = 12*8000= Rs. 96000 Usual outgoings = 0.20 * 96000= RS.19200 Net annual Rent= 96000-19200= Rs.76,800 Following factors are to be carefully considered while deciding the rate of interest for capitalization. I. The property is jointly and equally held by 4 brothers and it will be difficult if not impossible to sell the property. II. The design of the building such that it can only be used for specific purpose, namely a college building. III. If at all it is decided to put for other use, additions and alterations needed with heavy investments, will have to be carried out. III. If the present use of the building discontinuous any reason, it is likely that the property may fetch the same rent as available now. IV. The ha a sizeable amount as its capital value and hence, there will be limited willing and capable purchaser for the property, in case it is for sale in an open market. Considering all the above facts the net income is capitalised at 12% in perpetuity with Y.P. =8.33 perpetuity -the state or quality of lasting forever. Value of the property = 8.33 *76800 =Rs. 6,40,000 Share of each owner = 640000/ 4 = Rs. 1,60,000 Example: A freehold plot of land measures 600 m2. It is situated in middle class locality. A three stories building stands on the plot. With the following particulars, find out the value of the property. Built-up area on Ground Floor = 180m2 Permissible built-up on Ground Floor = 1/3 rd of plot area Total carpet area of 3 floors = 250m2 Average net rate of rent per m2 of carpet area excluding local taxes= Rs. 4/- Estimated future life of building - perpetuity Estimated rate of land = Rs 40/- per m2 Amount of usual outgoings = 1/6 of gross rent Rate of interest for capitalization = 7% Solution: Gross annual rent = 4*250*12 = Rs. 12000 Usual outgoings= 1/6 * 12000 = Rs. 2000 Net annual rent = 12000-2000 = Rs. 10000 YP (Years Purchase) allowing interest rate of 7% in perpetuity is 14.3. Capitalised value = 14.3*10000 = Rs. 143000 Add Extra open land available for future construction = 600-180*3= 60m2 Value of extra land = 40*60 = Rs. 2400/-* Total value of property = 143000+2400= RS. 1,45, 400 Thank You!