Estimation, Specification & Budgeting

Aishwarya H.
Valuation

● Technique of assessing the fair price of a property at the

stated time
● Determines the present value of the property for renting or
sale purpose
Purpose of Valuation

● Buying and selling property

● Taxation
● Rent fixation
● Security loans
● Compulsory acquisition
Factors affecting the value of a building
Salvage value

● Approximate resale value of a property at the end of its

useful life
● Deducted from the cost of a fixed asset to determine the
amount of the asset cost that will be depreciated
Scrap value

● Value of dismantled materials

● After building life period
● At the end of the utility period of a building, the dismantled
materials like steel, timber, bricks, etc will fetch certain
value → the Scrap Value
Market value

● The amount that can be obtained at any particular time

from the open market if the property is put on for sale
● May differ from time to time according to demand and
supply
Book value

● The amount shown in the account book after allowing the

necessary depreciation
● The Book Value of the property at a particular year is the
original cost minus the amount of depreciation up to the
previous year.
Depreciation

● The reduction in the market value of a property due to

structural deterioration, use, age, wear and tear, decay and
obsolescence
● The general annual decrease in the value of a property is
known as Annual Depreciation

Present value = Original cost - Depreciation

Sinking fund

● It is a technique for depreciating an asset while generating

enough money to replace it at the end of its useful life
● This fund sits in a sinking fund account and generates the
interest value of the property
Amount of SF to be accumulated = Original cost - Scrap value
Sinking fund

Annual instalment of sinking fund:

I = Si
(1+i)n -1

S- Total amount of sinking fund to be accumulated

i- Rate of interest in decimal
n- no. of years required to accumulate sinking fund
Numericals
1. A pumping set with a motor has been installed in a building at a
cost of ₹ 2,500. 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.

2. An old building has been purchased by a person at a cost of ₹

30,000 excluding cost of land. Calculate the amount of annual
sinking fund at 4% interest assuming the future life of building
as 20 years and the scrap value of building as 10% of the cost of
purchase.
Depreciation

● The reduction in the market value of a property due to

structural deterioration, use, age, wear and tear, decay and
obsolescence
● The general annual decrease in the value of a property is
known as Annual Depreciation

Present value = Original cost - Depreciation

Methods of Calculating Depreciation

1. Straight Line Method

2. Constant Percentage Method
3. Sinking Fund Method
4. Quantity Survey Method
Straight Line Method

Assumed that the property loses its value by the same

amount every year
Annual depreciation = (Original cost - Scrap value)
Life in years
= (C- S)
n
Constant Percentage Method

Assumed that the property will lose its value by a constant

percentage of its value at the beginning of every year
Let p be the constant percentage, Value of the property at the end
of first year = C- pC =C(1-p)
At the end of second year = C(1-p)- pC(1-p)= C (1-p)2
At the end of n years = C(1-p)n = S
Annual depreciation, p = 1- (S/C)(1/n)
Depreciated cost at the end of m years = C (S/C)(m/n)
Sinking Fund Method
The depreciation of the property is assumed to be equal to the annual sinking
fund plus interest of the accumulated sinking fund till that year
● Find out the annual SF ‘x’ at suitable rate of interest (i) for total life n
years of the building
x=i/(1+i)n -1

● Find out the accumulated amount y by depositing the annual amount of

SF at suitable rate of interest i for the age of n years of building
y = (1+i)n - 1/i

● Depreciation % for n years = xy

Sinking Fund Method

The depreciation of the property is assumed to be equal to the

annual sinking fund plus interest of the accumulated sinking
fund till that year
Quantity Survey Method

● The property is studied in detail and its value is

worked out
● Done by a professional and experienced valuator
Numericals

1. The total cost of a building is

Rs.1,50,000.Work out the depreciated cost of
the building after 20 years by straight line
method if the scrap value is Rs. 15,000;
assuming the life of the building is 80 years.
Numericals
1.

2. The cost of newly constructed building was

Rs.2,00,000. The life of the building is 75 years.
Determine the depreciation in the 30th year of life by
constant percentage method. The scrap value of the
building is 10% of its construction cost.
Capital Cost
● Total cost of construction, including land

● Original total amount required to possess a property

● Original cost and does not change, whereas value of a property is the
present cost which needs to be calculated
Annuity
● Annual periodic payments for repayments of the capital amount
invested by a party.

● Either paid at the beginning or at end of each period of instalment.

Year’s Purchase
● The capital sum required to be invested in order to receive an annuity of ₹1 at a
certain rate of interest.
For example: for a rate of interest is 5% per annum, one has to deposit Rs 100 to get Rs 5 per
annum Now, to get Re 1 he has to deposit 100/5 = Rs 20 per annum Therefore, YP = 100/ rate
of interest =1/R
● If the life of property is anticipated to be short, we must account for the
accumulation of sinking fund and interest on income of the property to replace
capital
Years Purchase (Y.P) = 1
(R+Sc)
Sc - Sinking Fund Coefficient
Numerical

Calculate the value of years purchase for a property if

its life is 20 yrs and the rate of interest is 5%. For
sinking fund the rate of interest is 4.5%
Capitalised Value

● Amount of Money whose annual interest at the highest prevailing rate

of interest is equal to the net income from the property

● Required to know the net income and highest prevailing rate of

interest

Capitalised Value = Net annual Income x Year’s Purchase

Calculation of Valuation of Building or Property
● Age of property affects the valuation of the building, so the age of the
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 age of
the building is available from the records (if available) or by visual
inspection or by enquiries.

Value = Present day Cost - Depreciation

Present-day Cost Determination
Determining the cost of construction of the building at present day rates

Methods:

1. Cost from the Record

2. Cost by Detailed Measurement
3. Cost by Plinth Area Method
Cost from the Record

● The cost of construction can be determined from the

estimations, 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 the present-day rate of materials and labors.
Cost by Detailed Measurement

● Laborious and lengthy method

● If the old record is not available, then the cost of construction

can be calculated by a 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 the building.
Cost by Plinth Area Method
● Simpler method

● The plinth area of the building is measured and calculated and

plinth-area rate of a 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 with the 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 the plinth area
method is judiciously used, then the cost calculation will be
precise and sufficient to suit practical purposes.
Determination of Depreciation

● 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 a very little depreciation of the building or
the structure.

● The depreciation increases with the age of the building.

Method of Valuation

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
Rental Method of valuation

● Rental income is calculated after deducting all outgoings

from the gross rent and years purchase is calculated after
adopting the current bank interest

Capitalised value = Net Rent x Year’s Purchase

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%,
Year’s Purchase = 100/5 = 20 years.
● The net rent multiplied by the year's purchase gives the
capitalized value or the valuation of the property. This method is
used only when the rent is known or probable rent is determined
by enquiries.
Direct Comparison with Capital Value

● When the rental value is not known but there are evidences
of sales prices of properties as a whole, this method of
direct comparison with the capital value of a 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 the locality.
Valuation based on Profit

● Profit is worked out after deducting all possible outgoings

Capitalised value = Net profit X year’s purchase

Valuation based on Profit
● Suitable for commercial properties such as hotels, restaurants, shops,
offices, malls, cinemas, theaters etc. for which the valuation depends
on the profit.
● Net annual income is worked out 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.
Valuation based on Cost

● The 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.
● Necessary depreciation is allowed and points of
obsolescence are considered.
Development method of valuation
● Suitable for properties which are in the undeveloped /partly developed / partly
undeveloped stage.
● For example, if a large piece 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.
● Also used for properties or buildings which are required to be renovated by
making alterations, additions, improvements etc. The value is calculated based on
the anticipated net income generated from the building after renovation work is
complete.
● The net income multiplied by year’s purchase gives the capitalised value of the
property. The actual cost of the property with a total cost of renovation shall be
compared with the anticipated value of the property to decide if the renovation is
justified.
Depreciation Method of Valuation
● Based on the 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 the present rate is calculated based on detailed

measurement.
Depreciation Method of Valuation
The depreciated value of each part is calculated by the formula:

D = P [(100 – rd)/100)]n

P - Cost of the building at present rate (as if new)

D - Depreciated value

rd - Fixed percentage of depreciation

n - Age of building in years

Depreciation Method of Valuation

rd values →
Depreciation Method of Valuation

● The valuation calculated is exclusive of the 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.
Numerical

Calculate the net capitalised value of a property fetching a net

annual rent of Rs. 25,000 and the highest prevailing rate of
interest being 7%.
Valuation of Land

1. Comparative Method

2. Belting Method

3. Hypothetical Building Scheme Method

Comparative Method

● Simplest and most direct method

● Valuation is based on comparison with neighborhood
● Following factors should be considered:
○ Situation
○ Size
○ Frontage
○ Front road width
○ Nature of soil
Belting Method

● Based on the road frontage

● Frontage land has greater value than back land
● Land is divided into a number of convenient strips by lines
parallel to the center-line of the road
● Each strip is known as a belt
● Calculate the values of each belt in terms of first belt
● Then sum up the values of each belt
B3
V3
Hypothetical Building Scheme Method
● Value 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
○ Net area of land
= Total area – Area of land required for essential amenities (30%)
○ Gross income = Net area X average sale price
○ From gross income, find out present value
○ From present value deduct the outgoings