Chapter Valuation

Valuation is the technique of estimating and determining the present fair value of a
property such as building, factory, land, engineering structures etc. The value of the property
mainly depends upon its structure, life, location, bank interest, legal control, supply and demand
and rent.

Value and cost

Cost: - Cost means purchase cost for which property was purchased or constructed. It
also includes land, cost etc.

Price:- This is an amount worked out adding the cost of production, interest on
investment etc.

Value: -Value means the present salable value of the property. It may be more or less
than original cost.

Purpose of valuation

1. For buying and selling

2. For fixation of rent (usually 6 to 10% of valuation)
3. For fixation of municipal tax, wealth tax, property tax etc.
4. For mortgage (security of loan)
5. For getting insurance
6. For compulsory acquisition:- When property is acquired by government,
compensation is given to owner such compensation is paid on the basis of
valuation.
7. For partition or separation of the property
8. For preparation of balance sheet of company

Principle of valuation

Following principles should be kept in mind while evaluating fair value of property.

1. Cost depends upon supply and demand

2. Cost depends upon its design, specification used and its location.
3. Cost varies with the purpose
4. Cost is affected by age and its condition of property
5. Present and future use of the property
6. Cost analysis must be based on statistical data.
7. In valuation, vender (seller) must be willing to sell and also the purchaser willing
to purchase. There should be no compulsion on either side.

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Factors affecting the value of the property
• Location
• Climatic condition
• Rise in population
• Supply and demand function
• Rate of interest
• Topography
• Rent restriction act
• Security of capital
• Abnormal condition
• Purpose
• Society level

Value Classification

Qualification of a valuer
A valuer is an expert who can work out the market value of a property based on scientific
analysis and instances of sales. A good valuer is an engineer who must possess sound
knowledge of the following subjects:-
• Surveying and leveling
• Estimating and costing
• Planning, Designing and construction works
• Experience in construction work
• Knowledge in market rate of land
• Building codes, building bye-laws of local bodies.
• Land acquisition and Town planning Act
• Fire insurance
• Report writing skills
• Knowledge regarding rent act and other prevailing acts and regulations.

Valuation of Land

Land values play an important role for the sustainable land management, as it is one of the
main components of Land Administration. Land values are determined with various
methods and standards by various organizations. Some differences come out among land
values obtained through various standards and methods. The existence of various values

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 such as tax value, market value, compensation value, mortgage value etc. for the same
parcel creates social- economic, juridical and technical problems. The developing countries
such as Nepal faces land valuation problems in legal and organizational, data and data
sharing and capacity building issue.

Land is fundamental to human existence and also a limited resource. It plays an important
role as a financial asset. Many land issues such as land valuation, land market, land
acquisitions, compensations, inefficient use of land is interconnected directly or indirectly
for managing land. Land valuation as one of the important component of Land
Administration is the process of valuing land. The value usually determined is the land's
market value. Furthermore, all properties differ from each other in their location and are an
important factor in their value. A valuer doesn’t need a license or any certification for
property valuation in some countries but most of the countries require licensed or certified
land valuer.

Many developed countries such as Spain, Germany and the Netherlands, have a valuation
law or regulation for property valuation (Yomralioglu, 2009) whereas lack of creating an
integrative structuring in technical, administrative, and legislative aspects in developing
countries causes problems in land applications. In Turkey, a centralized implementation of
studies conducted in the national- In recent years, there is a need for land value both in
national and international standardization regarding spatial data. There is an e-state project
with an objective to establish a Geographic Information System infrastructure in
accordance with national-level technological developments and the inspire directive ,
develop a web portal on which public institutions and organizations can provide users with
geographical information which is under their responsibility through a common
infrastructure, create the content standards of geographical data to respond to the needs of
all user institutions and determine geographical data interchange standards (TUCBS, 2010:
Candas & Yomralioglu, 2014).

A large number of professional valuation organizations have been established in developed

countries such as International Valuation Standards Council and The European Group of
Valuers’ Associations. Appraisers Association of Turkey and Appraisers Association are
some available institutions in the field of valuation in Turkey. These professional
organizations have been established to; ensure reliability and transparency of valuation
activities, determine international valuation standards for land valuation, create and extend
international valuation standards, collect all professional organizations under a single
umbrella and supports information exchange

Classification of Land in Nepal

Before Survey and Measurement Rules 2002, land grading was of two categories as
Dhanhar and Bhit or Pakho. The classification of land was Abal, Dyoam, Sim and Chahar
as first, second, third and fourth grade land based on the productivity of land. The eighth
amendment of Survey and Measurement Act in 2001 and Survey and Measurement rules
2002 has improved the classification (grading) of lands. The grading is based on the land
use and classified as follows:
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 a. Agricultural Area
b. Commercial and Residential Area

Major organizations for land valuation in Nepal

There are various organizations involving for Land valuation in Nepal. The major
organizations and their role are mentioned on following sections.

a) District Land Revenue Office

According to Land Revenue Act, the purpose of land valuation is for taxation, which is the
revenue for the government during land registration. The minimum valuation is provided
by the committee and valuation is updated yearly.

b) Local Development organizations (VDC/Municipality)

Local authorities carried out valuation of land for collection of tax during construction of
structures by minimum valuation method and cost method based on local self-governance
Act. The basis for valuation is according to the committee formed at local level (political
parties) representative as well as land expert and public.

c) Financial Institutions

The various financial institutions carryout valuation of land for the purpose of providing
loans based on the mortgage. The basis for valuation is sales comparison and minimum
valuation of land by land revenue office.

d) Judicial and semi-judicial authorities for liquidity

Legislative and judicial authority carried out valuation for the purpose of Land deposit or
bailment by the accused person. Generally, it applies thumb rule and valuated based on
minimum valuation and sometimes values are recommended by the local authorities.

Current legal provision for land valuation in Nepal

There are various legal provisions for Land valuation and compensation in Nepal. The
major laws for the provision of valuation are mentioned as follows.

- The Constitution of Nepal 2015

- Land Revenue Act (Malpot Ain)
- House and Land Tax Act (GharJagga Kar Ain) - Property Tax act (Sampati Kar Ain)
- Land Related Act (Bhumi Sambandhi Ain)
- Land Acquisition Act (Jagga Prapti Ain)
- CooperativeAct(SahakariAin)

Report writing

Terms used in valuation

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 1. Book value
2. Market value
3. Salvage value: 10% (assembly price of the life)
4. Sentimental value
5. Obsolesces
6. Distress value (due to financial problem, lower than market value)
7. Gross income
8. Net income
9. Outgoing
10. Sinking fund
11. Scrap value
12. Salvage value
13. Depreciation

Book value:

Book value is the amount shown in the account book after deducting depreciation.
Book value = Original cost – Depreciation up to previous year.
Book value reduces every year and ultimately reduces to scrap value or salvage value.

Market value:

It is the value of structure (at any particular time) which you can get in open market
when you keep the structure on open market when you keep the structure on sale.

Salvage value:

It is the value at the end of utility. A machine after end of utility period can be sold out
at some amount which is known as salvage value. It is taken 10% of original cost.

Sentimental value:

The sentiments or feelings are sometimes attached and may pay much more than the
actual value of the property. It is not related to market value.

Obsolescence:

The value of property or structure becomes less by its becoming out of date in style, in
structure, in design etc.

Distress value:

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 When a property is sold at a lower price than that of an open market rate, due to financial
difficulties, war or conflicts, it is said to have a distress value.

Gross income:

Gross income is the total income and sources in which operational and collection charges
are not deducted.

Net income:

It is the amount left after deducting all outgoings, operational and collection expanses
from the gross income or total receipts.

Net income = Gross income – out going

Out going:

Outgoing or the expenses which are required to be incurred to maintain the revenue of
building e.g. Municipality tax, repair and maintenance, management and collection
charges, sinking fund, loss of rent etc.

Repair and maintenance = 10 to 15% of Gross income

Management and collection = 5 to 10% of Gross income

Sinking fund:

A certain amount of gross rent is set annually as sinking fund to accumulate the total
cost of construction when the life of building is over.

Or

The fund which is gradually accumulated by way of periodic on annual deposit for the
replacement of the building or structure at the end of its useful life is termed as sinking
fund.

Scrap value:

Scrap value is the amount obtained by selling dismantled materials e.g. When the life
span of building is over, dismantled materials like brick, timber, steel will get certain
amount which is scrap value of building. It is generally taken 10% of original cost.

Salvage value:

It is the value at the end of utility period of building without being dismantled. A
machine after end of utility period can be sold out at some amount which is known as
salvage value. It is taken as 10% of total cost.

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Capitalized value:

It is the amount of money whose annual interest at highest prevailing market/bank

interest rate will be equal to net income from the property.

Capitalized value = net income X year’s purchase

1
Year’s purchase = for indefinite period
i
Where, i = rate of interest in decimal (i.e. 5% = .05)

Example Find the capitalized value of a property having a net annual rent of Rs
2000/- when the highest prevailing rate of interest is 8.5%
Solution Capitalized value of the property = Net income X Years purchase
= 2000 X 1/.085
To get Rs 23529/- interest
Depreciation:

Depreciation is loss in value of property due to structural deterioration use, life, wear
and tear, decay and obsolescence. It depends upon the original condition, quality of
maintenance and uses.
Types:
1. Physical depreciation:
- Weaken and tear
- Natural forces
2. Functional depreciation
- Inadequacy
- Obsolescence

Method of calculating depreciation:

1. Straight line method

1 Constant percentage method or declining balance method
2 Sinking fund method
3 Quantity survey method

1. Straight line method: This method defines the property loss by the same amount
in every year. A fix amount is deducted every year.

Original Cost − Scrap Value

Annual depreciation (Da) = C−S =
n Life in year

2. Constant percentage method or declining balance method: This method defines

that property will loss by a constant percentage of its value at the beginning of every
year.
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 S
Annual depreciation, Da =1 - ( )1 / n where Da, S, C & n is same as above
C
Note: this formula will fail when S = 0

3. Sinking fund method: In this method the depreciation of property is assumed to

be equal to the annual sinking fund plus the interest on the fund for the year, which is
supposed to be invested on interest bearing investment.

Example: Calculate the value of years purchase for a property if its life is 20 years and the
rate of interest is 50%. For sinking fund the rate of interest is 4.5%.
Solution: Years purchase (Y.P.) = 1
i + Sc
Where, R is rate of interest in decimal
Sc is coefficient of sinking fund
Coefficient of sinking fund Sc,
= i Where R1 is interest rate for sinking fund
(1+i) n-1
= .0045
(1+0.045)20-1
= 0.0319
Years purchase (Y.P.) = 1 = 12.21
0.05 + 0.0319
[Note: In case the life of the property is predicted the years purchase value has to be modified slightly. This is done
so that the property holder may set aside a portion of his income in the form of sinking fund otherwise he
will lose both capital and income at the end of the useful life period.]

4. Quantity survey method: This method determines the exact value of the property by
studying in details and loss in value due to wear and tear, decay etc. This can be done
only be experienced valuator.

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. Depreciation method of valuation
6. Development method of valuation

1. Rental method of valuation:

In this method the net income by way of rent is found out by deducting
outgoings from gross rent. A suitable rate of interest as prevailing in the market is
assumed and year’s purchase is calculated. This net income is multiplied by
year’s purchase to get capitalized value or valuation of property.

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 To work out capitalized value by rent rental method of valuation, following
information is required:
? Land and its occupancy
? Cubic content of building
? Future life of building
? Gross rent
? Out goings
? Year's purchase: it is workout by knowing rate of interest, life of
property and sinking fund coefficient.
? Land value

Capitalized value of the property is worked by:

We know that
Net rent = Gross rent – out goings
Knowing future life of the property and rate of interest, years purchase
can be calculated as:
Y.P. = 1
i + Sc
Capitalized value = Net rent X Y.P.

2. Direct comparison with capital value: This method is adopted when the rented
value is not available for the property concerned but there is evidence of sale
price of property as a whole. In this method, capitalized value of similar property
is fixed by direct comparison with capitalized value of similar property in the
locality.

3. Valuation based on profit: This method is adopted for building like hotel,
cinemas, theatres etc. for which capitalized value depends on the profit. Net
income is calculated after deducting from the gross income. The net profit is
multiplied by Y.P. to get the capitalized value.

4. Valuation based on cost: In this method, the actual cost for construction of
building is possesses the property to determine the value of property.
Depreciation should be deducted.

5. Development method of valuation: This type of valuation is suitable in the

underdeveloped stage or partly develop or partly undeveloped stage. For the
development of land by making plots after providing of road, parks etc. this
method is adopted.
Or, for the renovation of building by making additional requirements this
method is adopted

In this method, plinth area is firstly calculated and then multiplied by prevailing
plinth area rate to get present value of property.

Procedure

C Find out the net area

Net area = Total area – total area of land required for essentials amenities like
roads, parks, drainages, sub station, foot path etc. (30 to 40&)
C Calculate the gross income
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 Gross income = Net area of land available for plotting * Average sales price
C From gross income, find out present value

Outgoings:

C Cost of development = expenses for road, footpath, drainage etc

C Payments for essential rights
C Engineer’s and architect fee
C Stamp charge, booker charges etc ( 10% )
C Developer’s profit – 15 to 20% of present value

6. Depreciation method of valuation: this type of valuation determines the valuation

of building that should be divided into four parts –
- Walls
- Roofs
- Floors
- Doors and Walls
The cost of each parts should be worked out by the present rate from the
measurement of detail estimate. The life of each four parts is followed with the
help of table which is given below.

100 − rd n
The depreciated value of each parts is calculated by D = P ( ) Where,
100
D is the depreciation value of each parts
P is present market value rate
rd is fix percentage of depreciation rate( rate of depreciation, r stands for rate and
d for depreciation)
n is number of year where building had been constructed.
rd = 1.0 for 100 years of building structure
rd = 1.3 for 75 years of building structure
rd = 2.0 for 50 years of building structure
rd = 4.0 for 25 years of building structure
rd = 5.0 for 20 years of building structure

Problem – 1
A building is let out @ Rs 500/- per month. The total out goings of the property is
estimated to be 15% of the gross income, calculate the capitalized value of the property if
the present rate is 6% and life of the property is 50 years.

Solution:
Gross rent = 500 X 12 = Rs 6000/- annually
Outgoings = 15% of gross rent
= 6000 X 15 = Rs 900/- annually
100
Net rent = 6000-900 = Rs 5100/-
Y.P. = 1 = 1/.06 = 16.67
i
Therefore, Capitalized value = 5100 X 1/.06

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Problem –2

A RCC frame structure 8 storied building having a cubic content of 1400 m3 was constructed 15
years back on free hold land to measure about 1100 m2. The building fetches rent of amount Rs
14000 per month. What amount will you recommended for advancing a loan to the owner
against montage if the rate of land in that area is Rs 500 per m2

Insurance premium = Rs 900 per annum

Repair and maintenance = 8% of gross rent
Management and collection charge = 8% of gross rent
Municipality tax = 30% of gross rent
Assure the future life to be 60 years
Rate of interest as 8% and for redemption of capital is 5%

Solution,
Capital value = Net income * Year purchase
1
= (Gross rent – Out going) *
i + Sc
Gross rent = 14000 * 12 = Rs 168000 per annum
i 0.05
Sc = = = 0.00282
(1 + i ) − 1 (1 + 0.05)60 − 1
n

1 1
Y.P. = = = 12.07
i + Sc 0.08 + 0.0028

Out goings

• Insurance premium = Rs 900/-

• Repair and maintenance = 168000 * 8/100 = Rs 13440
• Management and collection = 168000 * 8/100 = Rs 13400
• Municipality tax = 168000 * 30/100 = Rs 50400
Total Rs 78180/-
Net rent = 168000 – 78180 = Rs 89820/-
Capitalized value = 89820 * 12.07 = Rs 1084127.4
Value of land = 1100 * 500 = Rs 550000/-
Total value of property = Rs 5500 + 1084127.4 = Rs 1634756/-
Loan recommended = up to 60% of valuation = Rs 980853.6/-

Problem – 3

A prospective investor desires to purchase a piece of converted land measuring 156000

in area after developing this land for housing colony. He wants to sell the plots (800m2 in area)
at the rate of 40 per m2. Which is prevailing in the vicinity and thus earns net profit of 20%.
Assuming usual development charges, work out the variation of undeveloped property
mentioned above (engineer’s charge and missellenous charges ie, 4% of sale price).
Solution,
Total area of land = 156000 m2
Net area = 156000 – 156000 * 30/100 = 109200 m2

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 109200
No of Plots = = 136.5 plot ( take 136 plot)
800
Selling price of one plot = 800 * 40 = Rs 32000
Gross income = 136 * 32000 = Rs 4352000
Outgoings,
Cost of development of lands by leveling, dressing and clearance etc @ Rs
0.5/m2
= 0.5 * 156000 = Rs 78000
Cost of providing roads, drainage, footpath parks etc @ 4/m2
= 156000 * 4 = Rs 624000
Architect & engineer’s fee = 4/100 * 4352000 = Rs 174080
Legal charge, broker, stamps and advertisement etc @ 10% of sales price
= 4352000 * 10/100
Developer’s profit 20% on gross income = 4352000 * 20/100
= Rs 870400
Total outgoings = 218168.0
Net income = 4352000 – 2181680
= Rs 2170320.0
2170320
Maximum rate of purchaser = = 13.91 /m2
156000

Problem – 4

Work out the valuation of a cinema hall with following data:

i. Cost of land = Rs 120000

ii. Gross income = Rs 750000
iii. Expenses undergone per year
a) To run cinema including staff salary, electric charges, municipality tax,
liscence fee, stationary and painting etc is 30% of gross income.
b) Repair and maintenance of machinery plant and equipment of 5% of their
capital cost which is Rs 950000.
c) Sinking fund for machinery whose life is estimated as 25 years at 4% after
that 10% scrap value.
d) Insurance premium = Rs 10000 per annum. Assume years purchase for 60
years at 8% and redemption of the capitalized at 4%
e) Annual repair of hall at 2% of the gross income.
Solution:
Capitalized value = net income * years purchase
1
= (Gross income – outgoing) *
i + Sc
Gross income = Rs 750000
Outgoings,
i. Running charges = 750000 * 30/100 = Rs 25000
ii. Repair and maintenance = 950000 * 5/100 Rs 47500
Si
iii. Sinking fund I= where
(1 + i ) n − 1
I = sinking fund
Si = total amount of sinking fund to be accumulated
950000 * 0.04
I= = Rs 20530
(1 + 0.04) 25 − 1
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 Capitalized value = Rs 950000
S = 950000 * 90/100 = Rs 855000
iv. Insurance premium = Rs 10000
iv. Annual repair and maintenance = 750000 * 2/100 = Rs 15000
Total outgoings = Rs 318030
Net income = 750000 – 318030 = Rs 431970
i 0.04
Sc = = = 0.004
(1 + i ) − 1 (1 + 0.04) 60 − 1
n

1 1
Y.P. = = = 11.87
i + Sc 0.004 + 0.08
Capitalized value = Rs 431970 * 11.87 = Rs 5130172.615
Cost of land = Rs 120000
Total value = 5130172.61 + 120000
= Rs 5250172.615/-

Problem – 5
A building is situated by the side of Kopundole main road in a Lalitpur sub
metropolitan city on a land plot of 500 sq meters. The built up portion is 20m X
15m. The building is first class type and is provided with water supply, sanitary
and electric fittings, the age of building being 30 years. Work out the valuation of
the property. Assume plinth area rate at that year is Rs 10000 per m2 and life of
building is 100 years and cost of land is 1500 per m2.
Solution,
Cost of land = 500 * 1500 = Rs 750000
Plinth area = 15 * 20 = 300m2
Cost of building =10000 * 300 = Rs 3000000
Present age = 30 years
Life = 100 years

100 − rd
) = 3000000 * ( 100 − 1 )30 = Rs 2219101.12
n
D=P (
100 100
.•. Valuation of property = 2219101.12 + 750000
= Rs 2969101.12

Problem – 6
A public building having 4 ropani plot of land is situated in the main road of
KTM metropolitan city with 500 m2 built up portion. The water supply, sanitary and
electric fittings and finishing of building is first class. The age of building is 15 years and
expected life of building is 100 years. Determine the value of the property assuming
prevailing market rate as follows:

Plinth area rate = Rs 12000/m2

Rate of land = Rs 6400000.0/Ropani

Solution,

Cost of land = 4 * 6400000 = Rs 25600000

Cost of building =500 * 12000 = Rs 6000000
Age of building = 15 years
Life = 100 years

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 100 − rd n 100 − 1 n
D=P ( ) = 6000000 * ( ) = Rs 4438202.24
100 100
.•. Valuation of property = 6400000 + 4438202.24
= Rs 10838202.24
Problem- 7

What will be the present value of the property consisting of 1st class building of plinth area 200
sq m (20 years old) on a land area 350 sq m. Consider the plinth area rate with w/s, sanitary and
electric fittings Rs 9500/- per sq m. The life of the building may be taken as 100 years and the
rate of land Rs 1560000/- per hectare.

Problem- 8

A building is situated by the side of Kathmandu main road on the plot of 500 sq m. The built up
portion is 300 sq m. The building is of first class type and is provided with water supply,
sanitary, electrical installation. The age of building is 30 years. Work out the valuation of the
property mentioned above if the plinth area rate of the area is Rs 2000 per sq m and take cost of
land is Rs 1000 per sq m. Life of building is 75 years.

Problem – 9

A building cost Rs 3500000/- has been constructed on a freehold land measuring 900 sqm
recently in kathmandu. Prevailing rate of land in the vicinity is Rs 900 per sqm. Determine the
gross monthly rent of the property, if the expenditure on all outgoings is Rs 360000/- per annum.
The net return on building is 6% of the construction and on land 4% of the cost.
Solution,
Given- Cost of building Rs 3,50,000/-
Area of land is 900 sqm
Rate of land is 900 per sqm
Total outgoings is Rs 3,60,000/- per annum
Interest rate is (i) – 6%
For sinking fund (R) - 4%
Determine gross monthly rent of the property
Capitalized value = Net income * Year purchase
Year purchase = 1/i+Sc
Gross income = Net income + Outgoings
Monthly rent = Gross income/12

Problem – 10
A person has purchased old one story buildin on a land 180 sqm having total plinth area 120
sqm for an amount of Rs 20,00,000/-. From record it is proved that the age of the building is 40
years. If the present value of land is Rs 6000/- per sqm and present plinth area rate is Rs 11500/-
per sqm. Work out your valuation to compare the above purchase value with the above
data.(Assume other missing data)
Solution:
Cost of property- Rs 20,00,000/-
Land area- 180 Sqm
Rate of land- Rs 600 per sqm
Plinth area of building- 120 sqm
Plinth area rate of building- 11500/-
Age of building is 40 years
Now, Present cost of building(P) = 11500*120= 13,80,000/-
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 depreciated value of building after 40 years
D= P( 100- rd ) n = 13,80,000 ( 100-1) 40 (Assume rd = 1)
100 100
= 9,23,181/-
Value of land = 180 * 6000 = 10,80,000/-
Cost of property after depreciation= 9,23,181+10,80,000= 20,03, 181/-
Purchased value of property = Rs 20,00,000/-
Therefore, purchase value of property is less then calculation value of property

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