Valuation of Building – Methods and Calculation of Valuation

Valuation of Building – Methods and Calculation of Valuation
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Valuation of Building

Valuation of building or property is the method of calculating the present marketable cost of a building. Valuation of a building depends on the sort of building, its structure, durability, location, size, shape, the width of roads, frontage, types and quality of building materials used and the cost of these materials.

Valuation of a building also depends on the height of the plinth, height of the building, thickness of its walls, nature of structure (such as load bearing or framed structure), type of flooring, roofing, doors and windows etc.

Location of a building also plays an important role in deciding the value of the building. For example, a building located in a market area would have a higher value than the same building located in a residential area. Also, the buildings located in areas having municipal water supply, sewer and electricity have increased values. A building located on a freehold land has a higher value compared to a building located on the leasehold land.

The valuation of building also depends on the demands for
purchase which varies from time to time. More demands make the building more
valuable.

A building may provide income to the owner in the form of rent; thus valuation also depends on the income the building can generate if let out. If a building is not let out, then 6% of the capital cost of the building is considered as the annual rent. It varies time to time and location and depends on the prevalent market rate.

Valuation of Building
Valuation of Building

Calculation of
Valuation of Building or Property

Age of property affects the valuation of the building, so
age of property should be known from the records or by enquiries or from visual
inspection and the future life of the building should be ascertained.

The valuation of the building is calculated by finding the present-day
cost of the building and allowing a suitable depreciation. The present-day cost
of the building can be calculated by:

1. Cost from the
Record

The cost of construction can be determined from the
estimated, from the bill of quantities and using the present-day rate of
building materials and labors. If the actual cost of construction of the
building is known, this cost can be manipulated by using the percentage of
increase or decrease to present day rate of materials and labors.

2. Cost by Detailed Measurement

If the old record is not available, then the cost of
construction can be calculated by detailed measurement of the building and preparing
the bill of quantities of various items of works. The present rate of materials
and labors are used to calculate the cost of building.

3. Cost by Plinth
Area Method

Plinth area method of calculating cost of building is simpler
than by detailed measurement method which is laborious and lengthy. In this
method, plinth area of the building is measured and calculated and plinth area
rate of similar building in the locality is obtained by enquiry and cost is calculated.

The plinth area method may not be accurate if the building
is not thoroughly examined and compared to reference building of the locality. To
fix this problem, different parts of the building such as foundation, structure,
floor, roof, doors, windows, finishing etc. should be thoroughly examined. If plinth
area method is judiciously used, then the cost calculated will be fairly correct
and sufficient for practical purpose.

Determination of
Depreciation

Depreciation is allowed to the current cost of the building to
calculate the valuation of the building or the structure. Depreciation depends
on the use of the building, age of the building and type of maintenance etc.
generally, for the first 5 to 10 years, there is very little depreciation of
the building or the structure. The depreciation increases with the age of the
building.

Consider a building with life of 80 years, if well maintained, following table shows the depreciation with the age of the building:

Age of Building Depreciation per Year Total Depreciation
0 to 5 years Nil
5 to 10 years @ 0.5% 2.5%
10 to 20 years @ 0.75% 7.5%
20 to 40 years @ 1 % 20 %
4o to 80 years @ 1.5 % 60 %
Total 90 %

The final 10% is the scrap value on the dismantling at the
end of the utility period.

Methods of Valuation
of Buildings and Properties

Following are the
different methods of valuations of the property:

  1. Rental Method of Valuation
  2. Direct comparison with capital value
  3. Valuation based on profit
  4. Valuation based on cost
  5. Development method of valuation
  6. Depreciation method of valuation

1. Rental Method of
valuation

In this method net income from the building is calculated by
deducting all the outgoings from gross rent. Year’s purchase (Y.P.) value is calculated
by assuming a suitable rate of interest prevailing in the market. For example,
consider a rate of interest as 5%, the Year’s Purchase = 100/5 = 20 years.

The net income multiplied by the years purchase gives the
capitalized value or the valuation of the property. This method is used only
when rent is known or probable rent is determined by enquiries.

2. Direct Comparison
with Capital Value

When the rental value is not known, this method of direct
comparison with capital value of similar property of the locality is used. In this
case, the valuation of the property is fixed by direct comparison with the valuation
or capitalized value of similar property in locality.

3. Valuation based on
Profit

This method of valuation is suitable for commercial
properties such as hotels, restaurants, shops, offices, malls, cinemas,
theaters etc. for which the valuation depends on the profit. In such cases the
net annual income is used form the valuation after deducting all the outgoings
and expenses from the gross income. The valuation of building or property is
found by multiplying the net income by year’s purchase. The valuation in this
case can be too high in comparison with the actual cost of construction.

4. Valuation based on
Cost

In this case actual cost of construction of the building or
the cost incurred in possessing the building is considered as the basis to
determine the valuation of the property. In this case necessary depreciation is
allowed and points of obsolescence is considered.

5. Development method of valuation

This method is suitable for properties which are not
completely developed yet and are under development stage. For example, if a
large place of land is to be divided into plots after provision for roads and
other amenities, this method is used. The probable selling price of the plots,
the area required for amenities and other expenditures for development is
considered for valuation.

Development method of valuation is also used for properties
or buildings which are required to be renovated by making altercations, additions,
improvements etc. The Value is calculated based on anticipated net income
generated from the building after renovation work is complete.

The net income multiplied by year’s purchase gives the
valuation of the property. The actual cost of property with total cost of
renovation shall be compared with anticipated value of the property to decide
if the renovation is justified.

6. Depreciation
Method of Valuation

Based on depreciation method, the valuation of the buildings
is divided into four parts:

  1. Walls
  2. Roofs
  3. Floors
  4. Doors and windows

Cost of each part at present rate is calculated based on detailed measurement. The life of each part if calculated by formula:

D = P [(100 – rd)/100)]n

where,
D = depreciated value
r  = rate
d = depreciation
n = age of building in years

rd values are considered as per following table:

Life of Building rd
100 years 1.0
75 years 1.3
50 years 2.0
25 years 4.0
20 years 5.0

The valuation calculated is exclusive of cost of land, amenities, water supply, electrical and sanitary fittings etc. and is used only for buildings which are well maintained. If it is not well maintained, then suitable deductions are considered in the valuation calculated above. The present values of the land, amenities, water supply, electrical and sanitary fittings should be added to find the valuation of the property.



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