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 framework, 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.
For example, a building located in a market area would have a stronger and higher valuation than the same building located in a residential area. Location of a building also plays an important role in deciding the value of a building. A building located on a freehold land generates a higher valuation amount compared to a building located on the leasehold land. Also, the buildings located in areas with proper municipal water supply, sewer and electricity have increased values.
The valuation of a building also depends on the demands for purchase which varies from time to time. More demands make the building more valuable.
If a building is not let out, then 6% of the capital cost of the building is considered as the annual rent. It varies from time to time and location and depends on the prevalent market rate. A building may offer income to the owner in the form of rent; thus valuation also depends on the income the building can generate if let out.
Age of property affects the valuation of the construction, 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 construction should be ascertained.
The valuation of the construction is calculated by finding the present-day cost of the construction and allowing a suitable depreciation. The present-day cost of the construction can be calculated by:
The cost of construction can be determined from the estimations, the bill of quantities and using the present-day rate of construction substances and labors. If the actual cost of construction of the construction is known, this cost can be manipulated by using the percentage of increase or decrease to the present-day rate of substances and labors.
If the old record is not available, then the cost of building 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 substances and labors are used to calculate the cost of the building.
Plinth area method of calculating the cost of a construction is simpler than the detailed measurement method which is laborious and lengthy. In this method, the plinth area of the construction is measured and calculated and plinth-area rate of a similar construction in the locality is obtained by enquiry and cost is calculated.
To fix this problem, different parts of the construction such as foundation, framework, floor, roof, doors, windows, finishing etc. The plinth area method may not be accurate if the construction is not thoroughly examined and compared with the reference construction of the locality. 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.
Depreciation depends on the use of the building, age of the building and type of maintenance etc. Depreciation is allowed to the current cost of the building to calculate the valuation of the building or the structure. The depreciation increases with the age of the building. generally, for the first 5 to 10 years, there is a very little depreciation of the building or the structure.
Consider a building with a life of 80 years, if well maintained, the following table shows the depreciation with the age of the building:
The final 10% is the scrap value on the dismantling at the end of the utility period.
Following are the different approaches of valuations of the property:
Year’s purchase (Y.P.) value is calculated by assuming a suitable rate of interest prevailing in the market. for instance, consider a rate of interest as 5%, the Year’s Purchase = 100/5 = 20 years. In this approach, net income from the construction is calculated by deducting all the outgoings from gross rent.
The net income multiplied by the year’s purchase gives the capitalized value or the valuation of the property. This approach is used only when the rent is known or probable rent is determined by enquiries.
When the rental value is not known, this approach 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.
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 from the valuation after deducting all the outgoings and expenses from the gross income. The valuation, in this case, can be too high in comparison with the actual cost of construction. The valuation of building or property is found by multiplying the net income by year’s purchase.
In this case, 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. In this case, necessary depreciation is allowed and points of obsolescence are considered.
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 needed for amenities and other expenditures for development is considered for valuation. This method is suitable for properties which are under the developmental stage.
Development method of valuation is 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 valuation 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.
Based on the depreciation method, the valuation of the buildings is divided into four parts:
Cost of each part at the present rate is calculated based on detailed measurement. The life of each part is calculated by the 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:
and is used only for buildings which are well maintained. The valuation calculated is exclusive of the cost of land, amenities, water supply, electrical and sanitary fittings etc. 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.
Read More: Methods of Detailed Construction Estimation Preparation Read More: Types of Construction Cost Estimation and Their Purposes