Valuation in Civil Engineering

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Valuation
Content
• Role of Valuer
• Different terms used in valuation
• Purpose and necessity of different terms
• Capitalized Value
• Years purchase
• Sink fund
• Depreciation
• Types of Values
• Purpose of Valuation
• Different Method of Valuation for
– Open Plots
– Open Plots with existing residential and commercial structures
– Lease Hold properties
• Use of Valuation Tables and Formulae

What is Valuation?
• Valuation is an Art of assessing
the present fair value of
property at stated time.
• Although It attempts at
suggesting the fair prices,
valuation is not an arbitrary
process
• All facts and judicious process
are considered to arrive at fair
value
• Rise and falls may occur in
short period of time, hence
Valuation report always
mentions date.

Value, Cost and Price
Value:
• Value means its worth or utility
• It depends largely on supply of
property and extent of demand
• Value may not have any relation
with cost of construction i.e. an
isolate house may not receive
its cost of construction as its
utility does not serve the
purpose.
• Property Value depends on:-
– Its utility
– Scarcity
– Events

Cost
• Its Original cost of construction and can be known after
accounting all expenditure from early stage to
completion.
• Cost of new construction = addition of cost of materials,
labour, equipment and overheads as current market rates
• Cost of old building = Cost of new construction – loss in
building due to wear and tear

Price
• Price = Cost of Production
+ Interest on Investment
+ Profit to
vendors/contractor
• Selling Price is fixed for a
commodity.
• For less demand the
selling price may have to
be fixed at lower of vice
versa

• Do it by yourself
Cost Value

Qualification and role of a Valuer
• An valuer is an expert who can work out the market value of a
property on scientific analysis and instances of sales.
• Generally a property valuer is en engineer or architect possessing
sound knowledge of the following:-
– Estimation and Costing
– Surveying and Leveling
– Planning and Designing
– Experience in construction works
– Building bye-laws of the local bodies
– Law of easements : construction on some other’s land
– Law of contracts
– Land acquisition and Town Planning act
– Arbitration
– Fire Insurance
– Central and local government’s taxation
– Money Market and rate of interest
– Zonal importance of land and building
– Writing Reports

Purpose of Valuation
Purpose and valuation of a property differ
according to the case. Some of the main purpose
are:-
• Purchase for investment or for occupation:-
• Tax Fixation
• Sale
• Rent Fixation
• Insurance Premium
• Mortgage value or security of loans
• Compulsory Acquisition
Continue…..

Purpose of Valuation
• Speculation
• Betterment Charges
• Wealth tax and Estate duty
• Gift tax
• Probate
• Partition
• Assessment of income or stamp fees
• Capital gains tax

Different terms in valuation
• Gross Income: Total income from all sources without
deducting the outgoing necessary for taxes,
maintenance, collection charges etc
• Outgoings: Expenses to be made because of
possession of property, it includes:-
– Taxes: Municipal tax, applicable on annual rental value
after deduction of repairs charges
– Repairs: 10% of gross rent. Sometimes 1-1.5% of cost of
construction
– Management charges: 4-5% for medium size property, 9-
10% for big estate. For building with no lift no charges.
– Insurance: Money kept aside for insurance of property
Conti…

• Outgoings: (conti…)
– Loss of Rent: Average loss of the part in 3 yrs may be
considered as a guide to calculate the yearly loss on
rent.
– Voids:
– Ground Rent: If structure is on lease hold property
then a specified amount for specified period will be
outgoing from gross income.
– Income Tax: In come tax on profit

• Factors affecting the value of a property
– Demand and Supply
– Rise in Population
– Cost of Construction
– Rent control act: despite increase in cost, tenanted
places may not fetch value increment.
– Imposition on control of prices of materials:-
– Improvement by public schemes: sewer, water,
electricity connection increase value
– Bank interest rate: Lower the bank rate, higher will be
the value of property
– Abnormal situation: wars, riots, flooded areas may
see drop in value.

• Net Income: Gross income less all outgoings
• Perpetual Income: Income receivable for indefinite
period
• Deferred Income: Income after a lapse of certain
period
• Scrap Value: Value of dismantled materials of a
property
• Salvage Value: Estimated value of a property without
dismantling it.
• Market Value: Value of property in open market
without any coercion and sentiment
Conti….

• Book Value: Value of a property shown in account book.
Its original cost less total depreciation till that year
• Assessed Value: Value of a property recorded in the
register of a municipality in order to determine the
amount of municipal taxes to be collected from owner of
property. Generally it is 5% of estimated cost of the
property
• Distress Value:Value when sold at lower price than market
value due to
– Financial difficulties of the seller
– Court Decree
– Insufficient knowledge of the seller
– Quarrel among partners
– Panic due to war or riots or civil commotion

• Replacement Value: Present value of a property
or portions thereof to be replaces at current
market rates
• Potential Value: Property fetching more return
due to its alternative use or advantageous
planning or providing some development works
• Monopoly Value: Land is scarce, sale of property
may attract fancy price.
• Sentimental Value: Owner wants to purcahse
some specific property at any cost because
he/she has sentiment attached to it.

• Speculative Value: speculation on property like
some development or road or waterline will pass
near to it, will increase value in future and sell at
them time. Make profit
• Accommodation Value: as city expands in terms
of accommodation, adjacent agriculture land wil
see hike in value
• Reversionary Value:
• Occupation Value:

• Sinking Fund:
– An amount which is kept aside at fixed intervals of
time (annually or monthly) out of gross income so
that at end of the useful life of the building, the fund
should accumulate to initial cost of the property
– At every internal fixed amount is deposited in bank
account, it accumulates and compound interest is
also applicable
– Sinking fund is not applicable on land

• Sinking Fund: Consider
• S = Total amount of sinking fund required
• I = annual instalment to be deposited
• i = Rate if interest expressed in decimanl
• n = number of years
• Ic = Coefficient of annual sinking fund so that I = Ic xS
– At the end of 1st year first installment ‘I’ amount will deposited and
it will accumulate to Ix(1+i)n-1
– Similarly 2nd installment will accumulate to Ix(1+i)n-2
– Then, Ix(1+i)n-1 + Ix(1+i)n-2 +......Ix(1+i)2 + Ix(1+i)1 = S
– Then
– Put S = 1, then I = Ic

• Sinking Fund: (Conti….
– What is S (salvage value):
• At the end of the period the cost of building will be equals scrap
value or salvage value.
• If building current cost is 40 lakh and if salvage value is 10% then
amount at the last would be 4 lakh
– Old building is purchased in 90 lakhs, cost of land is 50
lakh. Consider future life of building 20 yrs. What is
sinking fund amount at 5% interest rate, scrap value 10%
Amount depreciates (90-50)(1-10%) = 36 lakhs
So need 36 lakhs in 20 yrs, hence
I = 36lakhx0.05/[(1+0.05)^20-1)]
I = 108873/-

Present Value or Reversionary Value
• When a value of property is forcasted in future
and there should be a specific value in present
time which is taken basis for future value.
• Suppose PV(Present Value) is present value on
which interest rate is ‘i’ and after ‘n’ number of
years it becomes FV (Future value)
• PV (1+i)n = FV
• PV = FV / (1+i)n

Capitalized Value
• Interest on capitalized value of a property (at
highest prevailing rate) would be equal to net
income out of property
Capitalized Value x Interest Rate (i/100) = Net Annual
Income or return
or
Net annual return x 100/ i = Capitalized Value
• Ex : If a property gives 2.4 lakhs annual income
then what should be the rate of interest so that
a purchaser can think of purchasing that
property in 50 lakh
Ans : 4.8%

Capitalized Value
Essential Characteristics of an ideal investment
• An absolute safe security of capital ( house with
proper documentation)
• Stability of income (renting probability is higher
if its nearby public places)
• Capital can be realized easily at any time (easily
saleable if situation demands)
• Easily collection of income from investment
(tenant follows instruction)
• Certainty of realization by sale

Years Purchase
• Capitalized Value x i/100 = Net Annual return or
– Capitalized Value = 100/i x Net Annual Return or
– Capitalized Value = year’s purchase x net annual return
• Definition : Capital sum required to be invested in order
to receive a net annual income at a certain rate of
interest in perpetuity.
• Year’s Purchase (Y.P.) = 100 / i
We can interpret that A net annual income is received for some
number of years shall equate to capital invested also
We can also interpret that to receive 1 rupee as an annual
income, how much capital shall be invested.
• IF you expect ‘x’ amount as annual income, how much
capital do you have to invest?
= X * 100/i

Years Purchase
• Example : IF you plan to invest some amount in
a property and you expect 8% return on your
capital or investment. And that property
provides average monthly rent 25000/-. How
much capital you should invest and for how
many years ideally?
• Capitalized Value = 100/8 x (25000x12) = 37.5
lakhs
• Years = 100/8 = 12.5 yrs

Years Purchase
• Year’s purchase (Y.P.) = 100/ i
or Y.P. = 1/ (i/100)
or Y.P. = 1/ (Ip)
• But income of a property (return) should provide
both for interest of capital and accumulation of
sinking fund to replace the capital. Hence Year’s
purchase (Y.P.) will become
– Y.P. = 1 / (Ip+Ic) Derivation in Next slide
– Ip is rate of interest on capital in decimal
– Ic is annual sinking fund to replace 1 rupee (Re 1.00) at
the expiry of the term
– Ic = i / [(1+i)n-1]
– i = rate of interest on sinking fund in decimal

Years Purchase
Derivation for Year’s Purchase

Years Purchase
• Year’s Purchase in perpetual : If Net annual return is for
long time period, the Sinking Fund coefficient is
neglected and YP is calculated by dividing 100 by rate of
interest on capital
• Year’s Purchase for terminable income: When income is
for limited duration then YP is calculated considering rate
of interest on capital and accumulation of sinking fund.
• Single Rate : If rate of interest on capital is equals to rate
of interest on deposit for sinking fund, its called single
rate
• Dual Rate: if both are different its called dual rate
• Interest rate for sinking fund is also called interest rate
for redemption of capital

Depreciation
• Definition: It is loss in the value of property due to
its use, life, wear, tear, decay and obsolescence
• Thus Value of property gradually decreases in utility
period up to a certain scrap/salvage value
• General decreases in value is called Annual
depreciation
• Present Value is worked considering annual rate of
physical deterioration multiplied by building’s age
• There are 3 Types of Depreciation
– Physical
– Functional
– Contingent
– Obsolescence

Depreciation
• Physical Depreciation
– Due to wear and tear from operation
• A ware house is used for heavy machinery movement will see more depreciation
rate.
– Decrepitude (action of time and elements)
• A building situated in rough weather will see more depreciation rate as compared
to calm weather.
• Functional Depreciation
– Due its constant use, i.e. a vehicle used for 10000 km in 2 yrs will see
more functional depreciation as compared to the one used for 5000 km
in 2 yrs.
– When a property has single bathroom for 2 bedroom will see more
functional depreciation.
• Contingent Depreciation
– Accidents, structural defects
– Diseases (parasites, pollution of water in building)
– Diminution of supply (natural gas, water)

Depreciation
• Obsolescence: It is Loss of value of property due to change in:-
– Fashions, Design, Structure
– Inadequacy due to present needs
– Necessity for replacement due to new invention
– Old load bearing structure will see more obsolescence value than RCC
one.
• Internal Obsolescence:
– Due to Odd original design
– Change in type of construction
– Change in utility demand
• External Obsolescence:
– Due to location of building
– Change in character of district
– Factories or pollution in proximity
– Traffics, noises
– Zoning laws

Depreciation
• Difference between Depreciation and
Obsolescence
• Do it by yourself

Depreciation
• Appreciation:
– Age is detrimental to the property value
– Proper maintenance and repair will enhances in property value
• Amortization:
– Accumulation of sinking fund at compound interest for payment of
debt
• Annuity
– Annual instalment for repayment of capital (invested in a property)
for specified period
– Annuity is paid either beginning or at the end of each period of
instalment
– Annuity Certain: If it is end of the period is called
– Annuity Due: If it is at the beginning is called
– Perpetual Annuity: If annuity is received for indefinite period
– Deferred Annuity: If it starts after few years

Depreciation
• Annuity (conti..)
– Annual Installment calculation: S is loan amount, i is interest rate by bank for
compound interest, n is number of years equal instalment as per number of
years, x is annual installment
– S amount and its compound interest shall be equal to sum of all the
instalments(with its compounded interests)

Depreciation
• Annuity (conti..)
– A loan amount 4 crores has been granted by SBI bank
to a property developer for construction project. The
load shall be repaid by way of annuity @ 8.5% interest
p.a. in 25 equal installment from the year of
commissioning of scheme. Find out the amount of
annual repayment.
Installment = Pi(1+i)n / [(1+i)n-1]
Installment = 40000000x0.085x(1.085)25/[(1.085)25-1]
Installment = 39.08 lakhs

Depreciation
Methods of calculating depreciation:
• Straight line method
– Annual depreciation = (Original Cost – Scrap
Value)/life span
– Book Value at time t = Original Cost – (annual
depreciation) x t
• Constant percentage method (declining balance)
– Property looses value annually at constant
percentage of its value
– P is percentage rate of annual depreciation
– Book value
• At end of 1 yr = C(1-p)
• At end of 2nd yr = C(1-p)2
• At expiry = Sc = C(1-p)n
p = 1- (Sc/C)(1/n)
The above formula doesn’t work when scrap value is
zero
Note: (1) Book value = Original cost – all depreciations (2) Book Value at expiry = Scrap or Salvage Value

Depreciation
Methods of calculating depreciation (conti..)
• Sinking fund method
– Sinking fund deposited annually upto its life span is considered as depreciated
amount annually
– Hence first sinking fund is calculated using life span value and the sinking fund
formula
– Then that sinking fund value is depreciated annually and accumulated every year with
compound interest.
– This accumulated value with compound interest is depreciated amount till that time
‘t’
– So to calculate book value at time ‘t’, deduct depreciated amount from original cost
• Example: Cost construction of new building as per market rate is 25 crores
having life span 70 years. What will be the value of building after 15 years,
compound interest rate for sinking fund is 6%
• Sol: Sinking Fund annually = 0.06/(1.06^70-1) x 25 cr= 258,282
Depreciated amount after 15 yrs= 258282x(1.06^15-1)/0.06 = 60.11
lakhs
Book Value = 25 cr – 60.11 lakh = 24.39 cr

Depreciation
Methods of calculating depreciation (conti..)
• Quantity survey method
– Details of property and extent of physical deterioration
is worked out in order to calculate depreciation

Deferred Income
• Definition: An income which will commence after
lapse of certain period.
• This income may be receivable for perpetuity or
limited duration.
• But generally it remains for limited duration
• To find present value for single rate:-
– Find Net Annual Income
– YP for deferred period = YP for entire period – YP for
where no income started
– Present Value = Net Annual Income x YPdeferred

Deferred Income
• Ex: Present value of net income of 10000 p.a.
receivable for a period of 20 yrs but will commence
after 5 years at the rate of interest 7% p.a. on capital
as well on sinking fund
• Entire Period = 20+5 = 25 yrs
• YP for entire period = 11.65
• YP for 5 yrs = 4.1
• YP for balance period = 11.65-4.1 = 7.55
• Net annual income = 10000
• Present Capital Value = Net Income x YP
= 10000 x 7.55 = 75500/-

Deferred Income
To find present value for dual rates
• Find out Net annual income
• Calculate the Value at the time of commencing net annual returns for the
period in which income is coming (not for where income is not coming)
– Note : To calculate Value, consider Ip using interest rate on capital and Ic using
interest rate on sinking fund
• That Value shall provide present value by using interest rate of capital.

Rental Method of Valuation
• Formula:
Net Rent = Gross Rent – All outgoings
Capitalized Value = Net rent x Year’s Purchase
• Years purchase shall be worked by using bank interest rate
• During valuation by rental method the following particualrs
shall be considered
– Land and its tenure
– Shape of land or whether it is freehold or leashold on which
building is situated
– Cubic Contents of building
– Future life of building
– Gross Rent
– Outgoings
– Years Purchase
– Capital repairs if required
– Value of land from records

• When rent is maintained for years then market value
of property can be calculated by rental method
• This method is useful for a property with new building
• Difficulty in this method:
– Judicious judgement of outgoings is difficult
– Proportioning between land and building is not easy
– For Years purchase property returns depend on nature of
property and nature of occupants, this is not considered in
calculation.
– Sometimes Land and Building method of valuation is used
to check the valuations of Rental Method

Types of Rent (Go through in the book Chakraborthy)
• Standard Rent
• Ground Rent
• Unsecured Rent
• Secured Ground Rent
• Fair Rent
• Nominal Rent
• Rack Rent
• Head Rent
• Contractual Rent
• Improved Rent
• Profit Rent
• Virtual Rent
• Lease Rent

• Formula:
Net Rent = Gross Rent – All outgoings
• Ex1: Gross Rent is 20000, allowing 10% deductions
for repairs and maintenance charges. What will
rental value of property when rate of interest is
10%. Assume rent to be realized for long period
• Net rent = 20000 – 10%x20000
• Net rent = 18000
• Rental Value = Net Rental Income x YP
• Rental Value = 18000x 1/0.1 = 180,000

• Ex2:

Land and Building Method of Valuation
• Properties for Non-Profitable or community
functions do not direct relation with income
valuation hence here valuation methods are
different.
• General idea is to add the individual market value
of land and individual depreciated value of building.
• First, Valuation of Land for open plots. There are 3
methods
– Comparative Method
– Belting Method
– Hypothetical Method

• For open plots.
– Comparative Method: By comparing the similar
neighbourhood land and its sale prices. Consider
following factors for comparison
• Situation
• Size
• Shape
• Frontage and Depth
• Return Frontage

• For open plots.
– Belting Method
• Value of land is more with it has road frontage.
• In order to calculate value of plot, it is divided into
convenient strips.
• Each strip is known as Belt. Depth of Belt is judiciously
defined.
• Front Belt’s depth is taken at maximum value extent
• Second Belt’s depth is 1.5 times the First
• Third Belt’s depth is 1.5 time the second or remaining
• Value per unit area for Second Belt is 2/3 times of First
one
• Value of Per unit area for Third Belt is ½ times of First one

• For open plots.
– Belting Method (conti…)
• Value of recessed land not lying within the perpendiculars
drawn on belting lines from end points is valued at 3/4 value in
that particular belt
FB-1
SB-2
TB-3
FBR=3/4V1
SBR=3/4V2
TBR=3/4V3
Value V1
V2 = 2/3V1
V3 = 1/2V1
B3=1.5B2
B2=1.5B1
B1

• First, Valuation of Land for open plots
– Open Plots
– Open Plots with existing residential and commercial
structures
– Lease Hold properties

Valuation
Use of Valuation Tables and
Formulae
• Use of Valuation Tables and Formulae

Valuation in Civil Engineering

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