BASIC PRINCIPLES OF VALUATION

R Jayaraman ([email protected])

1.0 Preamble
Valuation in a broad sense means assessing the worth of something which may be tangible
assets like land / building or something intangible like brand / trademark / goodwill. There are
various methodologies of valuation. Any individual or a company is concerned with the value
of the asset that can be expected from a buyer or seller, if the property is put to sale. Hence,
conclusion drawn by the valuer in valuation report about the property needs a careful
examination. In a nutshell, a valuation is well-defined as
1. The process of determining the current worth of an asset or commodity.
2. Also, it can be termed as the determination of the economic value of an asset or liability.
3. The value of an asset or commodity is related to supply and demand curve.
4. If demand goes up the value will be more and if supply goes up then the value comes
down.
5. The value is a function of time, place and purpose.

There are many techniques that can be used to determine value. The valuer must have the
basic knowledge of the principles adopted in the valuation fields. The valuers need to acquire
knowledge of relevant accounting standards. Valuers need to understand the Indian and
international valuation standards.

1.1. Cost is a fact; price is a policy and value are an opinion.

Cost: Cost is the amount required to create or produce the good or service. Cost becomes a
historical fact as soon as its production is complete.

Price: The price paid for an asset is its cost to the buyer. Price is a term used for the amount
offered, or paid for a good or service. Price is formed by the interaction of demand and supply
in an economic market. When a transaction takes place, sale price becomes a historical fact.

Value: The word valuation is used to refer to the estimated value or to refer to the preparation
of the estimated value. Value is therefore a hypothetical price. It is a proxy for price. So, cost
is fact, price is policy, value is opinion.

1.2. Valuer
The valuer is a professional, who is an expert in valuation field. To value an asset, as a
technical man, he must have adequate knowledge in estimation, costing, planning,
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designing, updated knowledge in construction technology, government guidelines, rules and

regulations. And also, he will be an Engineer while correlating the structural details of the
buildings. He will be a lawyer while discussing the legal aspects arising out during the
inspection of the property. He will be a chartered accountant while doing the estimation and
costing. So, he must be a through knowledgeable professional in all the fields.

Valuer qualification Requirements: For all types of valuation assignments to carried out,
the valuer must be graduate in the specific discipline with the necessary qualifications,
recognised by any valuer organisation by becoming a member in that organisation. He must
qualify with required qualification and experience and register himself as a registered valuer
under the specific Government Act governing the recognition. For valuation under Income
Tax Act, he must be a Registered Valuer under Section 34 AB of the Wealth Tax Act. For
Companies Act, he must have passed the IBBI examination for qualifying as a registered
Valuer. The financial institutions recognise these valuers as their panel valuers.

2.0. Kinds of Value

There are different kinds of value and at least the following types of value are frequently used

 Market Value: Prevailing rate at which the buyer or seller wants to buy or sell and it
depends on the demand in that locality.

 Fair market value: The term used in normal conditions when the asset is sold or
valued as if it can fetch. It signifies the Market value. It is not a speculative or distress or
forced sale value.

 Guideline value: The minimum stamp duty value fixed by the stamp valuation
authority for registration purpose.

 Accommodation value: The value of land lacking in shape, size, or a recessed land,
lacking direct access from the road, or not independent will be having a lesser market value.

 Book value: Written down value (WDV) of an asset as shown in the Book of Accounts
and Balance sheet as per statutory requirements

 Breakup value: The estimated amount, when a Concern is closed, individual assets
are valued and sold separately

 Liquidation Value: Liquidation Value should take into account the costs of getting the
assets into saleable condition as well as those of the disposal activity. Liquidation Value can
be determined under two different premises of value: orderly liquidation and Forced sale.
An orderly liquidation is the value of a group of assets that could be realized in a liquidation
sale, given a reasonable period of time to find a purchaser, with the seller being compelled
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to sell on an as it is. This is also called Realizable value: The reasonable period of time to
find a purchaser (or purchasers) may vary by asset type and market conditions.
 Forced Sale value: It is the estimated amount of an asset, when sold in the open
market when the asset is under liquidation. The term “forced sale” is used in circumstances
where a seller is under compulsion to sell and that, as a consequence, a proper marketing
period is not possible and buyers may not be able to undertake adequate due diligence.

 Distress Value: Urgent disposal or liquidation of assets due to personal commitments,

communal riots, obsolescence, labour unrest. Other social, political uncertainties will
drastically reduce the market value.

 Going Concern value: It is an estimate of the profit-making running business price,

in the open market with all tangible and intangible assets with all liabilities.

 Equitable Value: It is the estimated price for the transfer of an asset or liability
between identified knowledgeable and willing parties that reflects the respective interests of
those parties.

 Investment Value: It is the value of an asset to a particular owner or prospective

owner for individual investment or operational objectives.

 Intrinsic value: The actual or true value of the asset, incurred by the owner of the
assets

 Monopoly value: It is the premium value or a fancy price of the assets due to demand,
non-availability of similar assets and these types of assets demand a special value due to
this peculiar advantages

 Mortgage value: The term used in financial institutions while the asset is surrendered
as security for the loans taken by the owner of the assets from financial institutions

 Salvage value: It is the estimated amount when an asset is sold in open market, after
the expiry of its life span, but still continued to be used due to its present conditions.

 Scrap value: The scrap value is defined when the asset has served its life and no
more it can be utilized for operation and it is completed in knock down status, the residual
parts are valued as a scrap pretending the scrap materials of the asset is sold in open market.
 Replacement value: This is the estimated cost of the asset to be incurred today, by
replacing a similar asset at current pricing.

 Reproduction value: This is the estimated cost of the asset to be incurred today, by
replacing a similar identical asset with the same technical specifications at current pricing.

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 Net present value: It is the present-day value of the asset derived by deducting the
depreciation amount from the replacement value of the asset

 Notional value: This is an imaginary value of asset or hypothetical value as required

for certain valuation process for statutory purpose

 Potential / special value: An asset will enjoy additional value due to demand by its
physical, geographic, economic or legal aspects. Due this factor the market value will be
increased.

 Synergistic value: The attributes of an asset that could be of value to a special

purchaser include any element of synergistic value that would be generated by its acquisition.
Synergistic value is an additional element of value created by the combination of two or more
interests where the value of the combined interest is worth more than the sum of the original
interests.

 Sentimental value: Value determined by the buyer or seller due to various

sentimental reasons. It is a personal value added to the market value of both buyer and seller.
It may not affect the fair market value.

 Speculative value: When a speculator invests in buying the asset with sole motive of
earning profit while selling of the asset after specific time. The speculator may foresee
likelihood of increase in asset value and makes investment and sells the asset on profit mode.

 Stigma value: Estimate of price of an unwilling purchaser based on assumptions for

suspicion or negative aspects of disliking the property for certain reasons, though the physical
conditions are good. Example: haunted house, suicide, near a burial / cremation ground.

 Statutory value: Property value estimated in accordance to the provisions of local

acts. Example: property tax act, stamps act, wealth tax act, registration act. (written down
value)

 Other values; present value, insurance value, residual value, fancy value,
depreciation value, commercial value, rental value, exchange value, face value, future value,
capital value, rental value and etc. All the above values are generally depending on the supply
and demand curve, utility value, obsolete technology, changing government acts,
reproduction cost.

3.0. Acts governing property

(a) The Indian Easements Act, 1882
(b) Government Grants Act,1875
(c) Indian Limitations Act, 1963
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(d) Transfer of Property Act, 1882

(e) Laws of Inheritance (Indian Succession Act, 1925, Hindu Succession Act, as amended
in 2015, Muslim Personal Law (Shariat) Application Act, 1937)
(f) Trust Act
(g) Indian Majority Act, 1875 (9 of 1875)
(h) Land Acquisition Act, 1894 and The Right to Fair Compensation and Transparency in
the Land Acquisition, Rehabilitation and Resettlement, Act 2013 (LARAR)
(i) Real Estate (Regulation & Development) Act, 2016 (RERA Act)
(j) Slum Areas (Improvement and Clearance) Act 1956
(k) Environment (Protection) Act 1986
(l) Forest (Conservation) Act of 1980
(m) Special Economic Zones Act, 2005
(n) Factories Act, 1978
(o) National Building Code of India (NBC) & IS code of practice
(p) Municipal Law
(q) National Highway Act
(r) Railways Act
(s) Civil Aviation Authority
(t) Indian Electricity Act.
(u) Petroleum Act, Essential Commodity Act, Consumer Protection Act, Explosive Act and
restriction on land reconversion
(v) Coastal Regulation Zone
(w) Waterbodies Regulation:
(x) Hill Conservation Regulations
(y) Building bylaws
(z) SARFEASI Act 2002, Income Tax Act and Companies Act

4.0. Land Classification

A land is classified in the following manner: Virgin land and Land with building or structures.
Based on locational criteria, the Directorate of Town & Country Planning term these lands
classify these properties as
1. Urban land
2. Non - urban land
3. Agricultural land or farm land (wet lands & dry lands)
4. Waste land
5. Barren land

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6. Forest
7. Mine
8. River
9. Channel, drain
10. Railway land
The land is further broadly classified as planning area and non-planning area. Planning area
means any area declared to be a regional planning area, local planning area or a site for a
new town under Town and Country Planning Act. It varies from state to state. Non-planning
areas are those areas other than planning areas within the jurisdiction of DTCP, which do not
have an approved master plan. The lands in Metropolitan Area are classified according to the
land use, buildings of special character, etc. in the following manner:
 Primary Residential
 Mixed Residential
 Commercial
 Industrial
 Special & Hazardous Industrial
 Institutional
 Open Space & Recreational
 Future Urban able area
 Future Non -Urban able area
 Agriculture
 Areas for Buildings of Special Character - Multi-storeyed Building Areas (MSB),
Continuous Building Areas (CBA), Economically Weaker Section Areas (EWS)
 Ecologically Sensitive Areas - Coastal Regulation Zone (CRZ), Aquifer Recharge
Area, Catchment Area
 Development Prohibited Area - Area around Indian Air Force Station, Swamp Area,
Areas around monuments notified by Govt. of India
 Areas of Special Character - MRTS Influence Area, IT Corridor, Areas around Airport
/Aerodrome)
 Natural Hazard Prone Areas
 Green Belt along Bye pass & Bye pass Roads

These essentials can be examined with government revenue records like a register, chitta,
adengal, topo plan survey sketch, FMB sketch and latest development plan.

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The unit measurement of land will be acres for large extent of land and smaller plots referred
by square foot or square metre. The terms kuzhi, cent, kaani, maa, veli, hectare, ares are
some of the terms used for unit measurement locally.
5.0 Property Classification
Property Valuation is carried out based on the rights he holds in the property, which are called
as Bundle of Rights. Ownership is a bundle of rights, with all special and limited rights,
liberties and power.
The owner is entitled to (Bundle of Rights)
 Use of property in any manner or
 Abuse the property till it result in nuisance or
 Enjoy it by exclusive possession or
 Derive benefits or
 Income or profits from it or
 Disposing it during his lifetime by sale or
 Gift or
 Will or
 Settlement or
 Grant lease or
 Create mortgage or
 Induct license

The properties are classified as free hold property and lease hold property.

 Free hold property – the property is occupied by the owner, Himself and has all rights
to use it on his own free will. He has all the rights with him and can do any act with respect
to the ownership.

 Leasehold property – a property is under lease is called a leasehold property. A lease is

a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an
asset. The lease agreement can be used to describe a lease in which the asset is tangible
asset. Language used is that the user rents the property let or rented out by the owner.
The term rental agreement is also sometimes used to describe a periodic lease agreement
(most often a month-to-month lease).
The lease will either provide specific provisions regarding the responsibilities and rights of
the lessee and lessor. In general, by paying the negotiated fee to the lessor, the lessee (also
called a tenant) has possession and use (the rental) of the leased property.
The most common form of real property lease is a residential rental agreement between
landlord and tenant. The lease may be for a long term or short term or perpetual.
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The lease agreements can be made for a day, month, year or years, depending on the
requirement of the lessee or lessor. The period stated in the lease agreement is termed as
lease period and after the lease period the lessee has to surrender the asset.
Where the lease purports to be 100 years or exceeding 100 years, the lease is called
perpetual lease. A long-term lease is for over 50 years and above up to 100 years. But
nowadays, lease period for even 30 years and above is considered as a long-term lease.

6.0 Valuation Methods

There are five methods of valuation adopted while doing valuation. The valuers utilize these
methods of valuation depending upon the nature of assets.

 Land and building method - value of land and building value are determined
separately and added to arrive at the present value.

 Rent capitalisation method - the value is assessed by capitalising the net annual rental
income with appropriate prevailing interest rate or rate of capitalisation.

 Profit method - the value is calculated at by capitalising with the Appropriate prevailing
interest rate or rate of capitalisation over the net profit derived from the asset. This net profit
derived from the asset must be the average net profit for the last 3 years and part of the
profit is due to good will must be properly reflected in the rate of return.

 Development method – used where an asset will be subject to more potential for
development. For example, a large extent of land converted as smaller plots or a residential
old house property converted as multi storeyed commercial complex. This method is
approached in a very cautious way, since we rely upon the market potential and future
expectations.

 Composite rate method – the term composite rate is the rate per Unit area of the
building in a multi dwelling unit along with a proportionate share of undivided land.
This rate is applicable in case of multi units built in a piece of land either as residential flats
or commercial or office space in a commercial complex.

7.0. Market rate of land

The market rate of land depends upon the supply and demand for land at that particular place
and time. This will be referred with the actual transaction carried out in surrounding area. The
market rate of land will also reflect the land use for

(i) Specific purpose

(ii) Future expectation
(iii) Development of land with the prevailing rules and regulations
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(iv) Constraints due to size

(v) Constraints due to shape
(vi) Location
(vii) Value appreciation
(viii) Locational advantage or disadvantage
(ix) Infrastructural facilities
(x) Water potential
(xi) Nature of soil.
 These market rates can be verified from enquiries with local residents, revenue
officials, real estate agents or brokers, any auction proceedings and comparable sale
instances available during that period.
 The guideline rate for registration of property by the registration department for fixation
of stamp duty will give a basic picture about the market rate at that place. But this will not be
the exact present market rate.
 The exact present market rate may fluctuate in correlation with the guideline rate,
depending upon the location, shape, size, usage for a specific purpose, future expectation,
development of land with the prevailing rules and regulations.
 The valuer has to take all in to account with local market rate enquiries and determine
the land market rate with due adjustments. The valuer must be able to convince that the rate
adopted by him is reasonable and justifiable. The prevailing market rate is to be adopted
while assessing the present market value.
 The valuer has to take all in to account with local market rate enquiries and determine
the present market value depending upon the location, shape, size, usage for a specific
purpose, future expectation, development of land with the prevailing rules and regulations.
 These present market values are adopted for investment purchase, selling, present
value of properties, mortgaging for loans, collateral security, arbitration, auction, wealth tax
purpose, insurance, court fee, partitions and settlement, visa purpose, amalgamation.

8.0. Factors affecting the value of land

a) Few Negative impacts on the market value

Classification of locality, Irregular land shape, Located in a low-lying area, Flood prone area,
Narrow approach road, Presence of grave yard, cemetery, burial ground, Presence of
hospitals, factories, Presence of airport, temples, marriage hall, community halls nearby,
Temple facing property, Electrical HT power line, Poor soil bearing capacity lands, Height
restriction, Inadvertent political or religious factors, Nearness to mines, quarries, government
banned lands, Less water potential, Without infrastructure facilities, Non-availability of
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transport facilities, Unapproved layouts. Heritage rules, Airport zone, waterbody regulations,
CRZ, and others Legal factors

b) Few positive impacts on the market value

Rectangular plot, Nearness to commercial entities, Schools, Markets, Bus stops or railway
station, Good water potential, Infrastructural facilities, Good soil bearing capacity, Approved
layout, Wide roads and others Legal factors

Remarks: The locked land with no approach (25% to 50% - different court judgements),
recessed lands with zero frontage (only adjacent plot owner will buy), tandem plot with
optimum approach from road (approach is through the front property either with or without
passage rights) have to be clearly identified by the valuer before ascertaining the market
value.
A return frontage is the term used for a corner property with two side or three side roads
around the property. The valuer may consider an additional increase in the market value due
to the above factor.
In case a property has more depth than the frontage, belting method is adopted while
determining the value. The property is split in to three or more belts, the first belt having a
depth of 1.50 times the frontage, the second depth 2.25 times and third depth 3.00 times and
so on. Or more familiar, 100% value is arrived for first belt, 67% for second belt and 33% for
third belt. There is no hard and fast rule that these percentages are to be adopted and the
valuer in his own judgement can fix the value according to the site conditions. He has the
responsibility of reporting the reasonableness of the value.

9.0 Buildings
The bureau of Indian standards, New Delhi has stipulated the methods of measurements of
plinth, carpet areas of buildings in the Indian standards is: 3861: 2002 and the excerpts from
it furnished for the benefit of all the valuers (vide annexure). The plinth area calculation must
be in accordance with the above standards.
The replacement cost of the building is the reproduction cost of a similar building as per the
technical specification adopted in the building according to the present prevailing rates of
materials and labour components on a particular date.
Both central government of India and the state governments prescribe a plinth area rates for
particular type of construction, for a particular place and construction period. These rates are
based on the data collected for actual cost of construction for place, period, type of structure
and technical specifications.

10.0. Depreciation
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Depreciation is fall in value of a building or structure due to functional obsolescence,

economic obsolescence and physical obsolescence.
Functional obsolescence relates to the reduction of a property’s usefulness or desirability
because of an outdated design feature that cannot be easily changed.
Physical obsolescence means physical deterioration over time, .i.e. the wear and tear,
decay, poor maintenance, poor quality of workmanship and materials used for construction
in the building and other natural factors.
Economic obsolescence, sometimes known as social obsolescence, occurs when property
values decrease because of external factors. With functional obsolescence the loss in value
to a property happens because issues pop up related to age or design factors.
Legal Obsolescence. Legislation, or other directive / order, issued by an authority having
jurisdiction, resulting in the prohibitive use of certain assets unless specified changes are
introduced or renewal is carried out.
External Obsolescence is a form of depreciation caused by factors not on the property itself,
such as environmental, social, or economic forces. (Ex: nearby garbage dump or public
toilet).
Depreciation Method adopted: The depreciation value may be worked out either by straight
line method or by linear method. For financial institutions, the straight-line method is adopted
and in court cases the linear method is adopted.

11.0 Present Building Value

The valuer has to find out the plinth area as per site conditions. The replacement cost of the
building is worked out as per plinth area rates given by government agencies.
Or a valuer can work out his own replacement cost with the prevailing market conditions and
have every responsibility to justify the same. The value of amenities and services is also
worked out. The depreciation value has to be adopted according to the age and deterioration
of the building. The present building value is determined by adding the replacement cost with
amenities and services and deducting the depreciated value.

12.0 Valuation for Banks

Valuation normally, is done by land and building method, profit method, rent capitalisation
method, development method and composite rate method. But the profit method, rent
capitalisation method are accounting methods and requires a chartered accountant’s help.

13.0. Property verification and valuation

 The actual property identification is very much required.
 It is insisted that the land has to be inspected along with the owner, govt revenue officials.
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 Verify the area by tallying the measurement on the four boundaries

 Verification of neighbours as per title document
 Checking the revenue records of the property.
 The valuer has to make survey about location of the property with respect to the
neighbourhood, nature, shape, size, factors affecting the value and usage of the property.
 Legal aspects involved in the property like lease, acquisition must be obtained from the
owner.
 It is further identified with the electrical service connection, property tax if a structure
exists on the property.

In case if a building is constructed in the property, then it is necessary that the valuer has to
Verify the approved plan, Find out the deviation in respect of floor, Plinth area, FSI, Plot
coverage, Provisions like drainage facilities, Car parking, internal and external services, Rain
water harvesting. Information regarding the building plan approving authority of that
particular place and his power for approval and in whose name the approval has been got (in
leasehold properties, the land will be owned by the lessee and the building may be owned by
the lessor).
The specifications of the building have to be clearly identified for working the replacement
cost of the building. Facilities provided in the property must be separately measured.
The amenities like Lift, Compound wall, Pathway or passage floor, Security room, Drainage
facilities, Car parking, Other facilities provided. The internal and external electrical, sanitary
and water supply services with their installation qualities are to be valued separately.

14.0. IBA & IVSC

The Indian Bankers Association in its IBA Handbook has formulated a Standard of Procedure
(SOP). The Government of India had recommended that the valuation standards for India
need to be in tune with international standards. With due permission from International
Valuation Standards Committee (IVSC), these are being adopted to suit Indian conditions.
And also, the valuers need to acquire knowledge of relevant accounting standards (Ind AS).
Valuers need to understand the Indian / International valuation standards.
To simplify each financial institution has standardized their valuation format. This also make
the valuer to have the same procedure for all asset valuation. It is easy for the valuer to cover
all requirements of the financial institutions and safeguard the valuer to fulfill his obligation.

15.0. Valuation Methods

15.1. Comparable method - For built up properties

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(a) (Flats/Shops/Offices) In Apartments and M.S. Buildings: The comparable method for
valuation of properties like Flats /Shops / Offices in Apartments / Multi-storeyed buildings can
be adopted. The sale instances should be noted and tabled in the same manner as that of
plots.
(b) Sale Instances for Built Up Properties: For making the rates of built up properties most
comparable with the property under consideration the following factors should be adjusted.
1. Location
2. Situation
3. Area (building & particular apartment)
4. Floor Difference
5. Specifications
6. Facilities / Services
7. Time-gap
8. Status (Lease or Freehold)
Suitable and proper adjustment should be made to make the rate for built up properties fully
comparable with the property.

15.2. Land and Building Method:

As the name indicates, in this method the value of land is added to the value of structure to
arrive at the fair market value of the property.

Land Value: The land value is to be determined by comparable sale instances which are to
be identified and then factors of adjustment / influence are to be applied.

Identification of Comparable Sales: It should be genuine and should not be forced,

accommodation and fancy sale.
Auction sale instances or the sales cleared by the Appropriate Authorities should be given
preference. In the absence of above, the local guidelines, auction / sale prices as fixed by
local development authority. Improvement Trust, reputed builder etc. may also be referred. It
should be proximate from situation angle.
For land value reliance has to be given to reliable and comparable contemporary sale
instances and these instances are to be analysed with reference to various factors impinging
on the land rate to arrive at a figure representing the fair market rate as prevailing on the
valuation date.

Factors of Adjustment: Two properties cannot be identical. They may not possess similar
advantage & disadvantage. All such factors of adjustment / influence affecting land rates are
to be considered. The main factors are: -

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(a) Location & Situation:

(b) Time-gap:
(c) Shape:
(d) Size:
(e) FAR:
(f) Side Open:
(g) Co-ownership Undivided share, rights & Interest:
(h) Land Tenure:
(i) Encumbrance:
(j) Unearned increase:
(k) Impact of Statutory Restrictions:
(l) Other Factors:

Cost of Building: The fair market value of the building on a valuation date is its cost of
reproduction on that date minus the depreciation from the date of completion of the building
to the date of its valuation. When an immovable property consisting of land and building is to
be valued the above method is adopted in certain circumstances viz.
i) fully owner occupied,
ii) untenanted or vacant.
Underlying concept for such valuation is the view that Fair Market Value of such property
reflected in the sum of the market value of vacant land as prevailing on the valuation date
regarding valuation of land,

Depreciation: With the passage of time, the value of building decreases and after economic
life of the building, its value becomes equal to its salvage value.
Normally reproduction cost of building is worked out with the help of Plinth Area Rates.
After working out the cost of building as new on the situation date, a deduction termed as
depreciation is allowed to arrive at the reproduction cost of the building at its present form.
To estimate the value of depreciation a valuer has to assess future life of the building (life of
a building is its economic life and not physical life) and this requires expertise of a Civil
Engineer or an Architect. Generally, the Straight-Line Method is followed.

Depreciation per annum = (Cost of reproduction - Salvage value)

Life of the building

As the salvage value is taken 10% of the cost of reproduction.

So, depreciation per annum = 0.90 X Cost of reproduction

Life of the building

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15.3. Rent Capitalization Method:

This method is generally resorted to in the following situations: -
(a) In case the land is fully developed i.e. it has been put to full use legally permissible and
economically justifiable and the income out the property is normal commercial and not a
controlled return or a return depreciated on account of special circumstances.
(b) In the case of fully tenanted property and statutory control of terms and conditions of
tenancy.
(c) In the case of a property small portion of which is self-occupied and balance large portion
is tenanted.
(d) In the case of commercial establishment like cinemas and hotels, if the building is given
on outright lease / rental basis and rent fetched is reasonable.
The rent which is foundation ingredient of rent capitalization method is net maintainable Rent
which is the difference of Gross maintainable rent and out goings. The other ingredient of this
method is year's purchases or rate of capitalization. Thus, to determine the fair market value
of the property gross income per annum is to be determined. From this income all the
outgoings which are essential to be incurred for maintenance are to be deducted to find out
the net maintainable rent or annual letting value. The Annual letting value multiplied by year's
purchase gives the fair market value of the property.

Gross Maintainable Rent: In case of partly self-occupied building, where rent capitalization
method is resorted to, the rent for self-occupied should be equal to prevailing market rent. In
case of commercial building, prevailing market rent in the locality should be adopted. In the
gross annual rent the following amounts should also include:
Interest on deposits not being advance payment towards the rent.
The amount of premium divided by the number of years of lease period, if the owner received
premium for leasing out the property.
The value of benefits or perquisite whether convertible into money or not, desired by the
owner as consideration for leasing of the property or any modification of the terms of lease.

Out Goings: Only those outgoings which are actually paid or payable will qualify for deduction
from the gross main tenable annual rent.
1. Municipal Taxes: 2. Repairs and maintenance Charges: 3. Ground Rent: 4. Insurance
Cover: 5. Management & Collection charges: 6. Service Charges: 7. In case of outgoings the
expenditures for common securities, maintenance charges, firefighting charges, Rain water
harvesting charges, maintenance on loan etc. may should also be considered.

Rate of Capitalization: Having determined the net maintainable annual rent and years
purchase the F.M.V. of the property = Net Maintainable Annual Rent X year's purchase.
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15.4. Development Method:

This method of valuation of large extent of land is adopted in the following situations.
(a) When the comparable sales of large tracts are not available but sales of small plot are
available.
(b) When the land is ripe for use for building purpose it possesses necessary potentialities for
urban use.
The complete procedure to determine the fair market value of the large tracts of land, under
this method can divided into the following steps.
1. Ascertain the demand for small plots in the area.
2. Determine the area of land required for development work as per municipal bye laws.
Deduct this area from the total area of the plot so as to ascertain the area available for
development of small size plots. By rough estimation it works out to 20 to 25% of the total
area.
3. Determine the number of small plots which can be legally carved out from the large tract of
land with necessary provisions for infrastructure facilities.
4. Determine the cost of development works such as cost in of construction of road as per
municipal specifications with street lights, cost of laying parks, underground drains, water
supply lines, sewer lines, electric lines & substation, earth fitting or cutting, cross drainage
works and municipal taxes on open land. As the total amount of development is not paid to
the contractor at the commence mend of work so defer it for half of the period of construction
at certain rate of interest say to 12%. Let the deferred value be (A).
5. Ascertain the total sale price of all the small plots of scheme on the valuation date from the
comparable sales of small developed plots. As all these small plots cannot be sold at one
time, so estimate the time of disposal of all the plots and defer the total sale price for half of
the period of the sale @ 10% to 12%. Let it be of (B).
6. From the deferred sale price (B) deduct the following.
(i) Present value of the cost of development deferred for half of the period of development (A)
along with architect or engineers fee for his supervision and getting the scheme approved.
(ii) Incidental charges such as cost of stamps, registration legal cost, cost of advertisement
etc. Normally it is 8% to 10% of (B). If the cost of stamp, registration and legal cost is to be
borne by the purchaser then this percentage should be modifier accordingly.
(iii) Developer's profit and risk 15% of (B).
7. This amount available after above deductions from (B) will represent the fair market value
of the large undeveloped plot on the date of valuation.

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15.5. Profit method

In the case of Hotels, Motels, Cinemas, Public houses, Petroleum Outlets which falls under
the category of the licensed premises, the Fair Market Value depends primarily on the earning
capacity of the property. The Fair Market Value of such properties is determined by applying
profit method.
(i) The owner runs Hotel, Cinema himself.
(ii) The owner gives Hotel or Cinema on conducting agreement to a conductor.
The F.M.V. of the property is determined by capitalizing the net profits (70% tangible + 30%
intangible) at certain rate of expenses, owners’ risk and other outgoings from the gross
income. For example, in the case of Cinema the following steps are to be taken to determine
its F.M.V.

Gross Income (Excluding entertainment tax): The gross income is estimated on the basis
of full house capacity less normal vacancies multiplied by the number of shows in a year. The
vacancies can be determined either from the actual sale of tickets details of which are
available with the owner. As the gross income may not be consistent, so the gross income &
expenses should be based on the average of last 3 preceding years.

Expenses: Operating expenses can be broadly classified: - Entertainment tax if included in

gross income, Total show tax, Hire charges of new reels, Other taxes pertaining to cinema
business, Octoroi, Freight charges, Publicity, Traveling expenses, Printing & stationary,
Salaries & Bonus, gratuity, provident fund, Welfare fund of staff, Carbon electrodes,
Telephone bills, Electricity bills, Postage & Telegrams, Insurance for building as well as plant
& machinery, Repair & maintenance, Ground rent, if any, Property tax, Sinking fund for
furniture, equipment and plant & machinery.

Owners risk & entrepreneurship: 15% of gross income in the case of owner runs the cinema
himself or 15% of conducting charges received by the owner form the conductor less the
owner's liabilities such as repairs & maintenance, ground rent, municipal taxes, collection
charges etc., if any borne by the conductor.

Net Profit: The net income is worked out by deducting the expenses from the gross income.

Rate of capitalization: The net profit is required to be divided into two parts.
(a) One due to land, building, furniture, equipment etc. called as tangible profit and generally
taken as 30 to 25% and is capitalized at interest rate 2% higher than the rate of interest for
tangible profits.

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(b) Other due to good will management, license called intangible profit and generally taken
as 30 to 25% and is capitalized at an interest rate 2% higher than the rate of interest for
tangible profits.

Fair Market Value: The total of capitalized values of tangible and intangible will give fair
market value of cinema.

15.6. Composite Rate Method:

An apartment, or flat, is a self-contained housing unit (a type of real estate) on a single storey
or multi storey that occupies a part of a larger building with several units. The term
"apartment" can be generically applied to any individual portion inside a building complex.
The building can be a house, large residential building, and even condominium high-rise,
where multi dwelling or commercial or office space units are provided.
Composite rate is the term used for valuation of a multi dwelling or commercial or office
space unit. This rate is applicable in case of multi units built in a piece of land either as
residential flats or commercial or office space in a commercial complex. Composite rate is
the rate per Unit of the super built up area of the building. This rate is the mixture or merger
of the rate of super-built up area of an apartment and the undivided share of land pertaining
to the portion of the building area. This rate depends on the land cost, building construction
cost, FSI, promoter’s margin.
Land cost Rs -------------
Cost of construction for total built up area Rs -------------
Cost of water, sanitary & electrical services Rs -------------
Cost of amenities provided Rs -------------
Cost of miscellaneous works Rs -------------
Add expenses (preparation of plan approval, taxes, deposits) Rs -------------
Final cost (total cost of the property development) Rs -------------
Interest on capital Rs -------------
Profit margin Rs -------------
Promoter’s sale price. Rs -------------
Unit composite rate per square foot sale price / total built up area Rs -------------

13.0 Conclusion: We must update our knowledge in valuation field and need to understand
the Indian / International valuation standards. We must be systematic and objective, for the
analysis and design techniques. We dedicate ourselves to the nation for the protection and
safety of the people as we have much impact on global sustainability.

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ANNEXURE- I

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FORMAT OF VALUATION REPORT

1. Introduction

a) Name of the Property Owner (with address & phone

nos.)
b) Purpose of Valuation
c) Date of Inspection of Property
d) Date of Valuation Report
e) Name of the Developer of Property
(in case of developer-built
properties)
2. Physical Characteristics of the Property

a) Location of the Property

i. Nearby landmark
ii. Postal Address of the Property
iii. Area of the plot/land (supported by a plan) iv.
Type of Land: Solid, Rocky, Marsh land,
reclaimed land, Water-logged, Land locked.
v. Independent access/approach to the
property etc.
vi. Google Map Location of the Property with a
neighbourhood layout map
vii. Details of roads abutting the property viii.
Description of adjoining property ix. Plot No.
Survey No.
x. Ward/Village/Taluka
xi. Sub-Registry/Block
xii. District
xiii. Any other aspect
b) Plinth Area, Carpet Area, and saleable are to be
mentioned separately and clarified

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c) Boundaries of the Plot As per Sale Actual

East Deed/TIR
West
North
South
3. Town Planning parameters

a) i. Master Plan provisions related to property in

terms of land use
ii. FAR- Floor Area Rise/FSI- Floor Space
Index permitted & consumed
iii. Ground coverage
iv. Comment on whether OC- Occupancy
Certificate has been issued or not
v. Comment on unauthorized constructions if
any vi. Transferability of developmental rights if
any, Building by-laws provision as applicable to
the property viz. setbacks, height restriction etc.
vi. Planning area/zone
vii. viii. Developmental controls
viii. ix. Zoning regulations
x. Comment on the surrounding land uses
and adjoining properties in terms of uses
xi. Comment on demolition proceedings if any
xii. Comment on compounding /regularization
proceedings
xiii. Any other Aspect
4. Document Details and Legal Aspects of Property

a) Ownership Documents
i. Sale Deed, Gift Deed, Lease Deed
ii. TIR of the Property
b) Name of the Owner/s

c) Ordinary status of freehold or leasehold including

restrictions on transfer
d) Agreement of easement if any

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e) Notification of acquisition if any

f) Notification of road widening if any
g) Heritage restriction, if any
h) Comment on transferability of the property
ownership
i) Comment on existing mortgages / charges /
encumbrances on the property, if any
j) Comment on whether the owners of the property
have issued any guarantee (personal or corporate)
as the case may be
k) Building plan sanction:
Authority approving the plan - Name
of the office of the Authority -
Any violation from the approved Building Plan -
l) Whether Property is Agricultural Land if yes, any
conversion is contemplated
m) Whether the property is SARFAESI compliant
n) All legal documents, receipts related to electricity,
Water tax, Municipal tax and other building taxes to
be verified and copies as applicable to be enclosed
with the report.
Observation on Dispute or Dues if any in payment of
bills/taxes to be reported.
o) Whether entire piece of land on which the unit is
set up / property is situated has been mortgaged or
to be mortgaged.
p) Qualification in TIR/mitigation suggested if any.
q) Any other aspect
5. Economic Aspects of the Property
a) i. Reasonable letting value
ii. If property is occupied by tenant
‐ Number of tenants
‐ Since how long (tenant- wise)
Status of tenancy right

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‐ Rent received per month (tenant-wise) with a

comparison of existing market rent
iii. Taxes and other outings
iv. Property Insurance
iv. Monthly maintenance charges
v. Security charges
vi. Any other aspect
6. Socio-cultural Aspects of the Property
a) Descriptive account of the location of the property
in terms of social structure of the area, population,
social stratification, regional origin, economic level,
location of slums, squatter settlements nearby, etc.
b) Whether property belongs to social infrastructure
like hospital, school, old age homes etc.
7. Functional and Utilitarian Aspects of the Property
a) i. Space allocation
ii. ii. Storage Spaces
iii. Utility spaces provided within building
iv. Car Parking facility
v. Balconies, etc.
b) Any other aspect
8. Infrastructure Availability
a) Aqua infrastructure availability
i. Water supply
ii. Sewerage/sanitation System Underground or
Open
iii. Storm water drainage
b) Physical infrastructure facilities
i. Solid waste management
ii. Electricity
iii. Road and public transport connectivity
iv. Availability of other public utilities nearby
c) Social infrastructure
i. School
ii. Medical facilities

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iii. Recreational facility in terms of parks and open

space
9. Marketability of the Property
a) Marketability of the property in terms of
i. Locational attributes
ii. Scarcity
iii. Demand and supply of the kind of subject
property
iv. Comparable sale prices in the locality
b) Any other aspect which has relevance on the value
or marketability of the property
10. Engineering and Technology Aspects of the Property
a) Type of construction
b) Material & technology used
c) Specifications,
d) Maintenance issues
e) Age of the building
f) Total life of the building
g) Extent of deterioration,
h) Structural safety
i) Protection against natural disaster viz. earthquakes,
j) Visible damage in the building
k) System of air-conditioning
l) Provision of firefighting
m) Copies of the plan and elevation of the building to
be included
11. Environmental Factors
a) Use of environment friendly building materials,
Green Building techniques if any
b) Provision of rain water harvesting
c) Use of solar heating and lightening systems, etc.,
d) Presence of environmental pollution in the vicinity
of the property in terms of industry, heavy traffic
etc.

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12. Architectural and aesthetic quality of the Property

a) Descriptive account on whether the building is
modern, old fashioned, plain looking or decorative,
heritage value, presence of landscape elements
etc.
13. Valuation
a) Methodology of valuation – Procedures adopted for
arriving at the valuation. Valuers may consider
various approaches and state explicitly the reason
for adopting particular approach and assumptions
made, basis adopted with supporting data,
comparable sales, and reconciliation of various
factors on which final value judgment is arrived at.
b) Prevailing Market Rate/Price trend of the Property
in the locality/city from property search sites viz
magickbricks.com, 99acres.com, makaan.com etc.
if available
c) Guideline Rate obtained from Registrar’s
office/State Govt. Gazette/ Income Tax Notification
d) Summary of Valuation
Land:
Building:
i. Guideline Value
ii. Fair Market Value
iii. Realizable Value
iv. iv. Forced/ Distress Sale value.
e) i. In case of variation of 20% or more in the
valuation proposed by the valuer and the
Guideline value provided in the State Govt.
notification or Income Tax Gazette justification on
variation has to be given.
ii. Details of last two transactions in the
Locality /area to be provided, if available.
14. Declaration:

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I hereby declare that:

i. The information provided is true and correct to the best of my knowledge and belief.
ii. The analysis and conclusions are limited by the reported assumptions and conditions.
iii. I have read the Handbook on Policy, Standard and Procedures for Real Estate
Valuation by Banks and HFIs in India, 2011, issued by IBA and NHB, fully understood the
provisions of the same and followed the provisions of the same to the best of my ability and
this report is in conformity to the Standards of Reporting enshrined in the above Handbook.
iv. I have no direct or indirect interest in the above property valued.
Name and address of the Valuer
………………………………………………….
\ Signature of the Valuer………………………………………… Date
Tel No…………………..
Mobile No……………..
Email…………………….
15. Enclosures

a) Layout plan sketch of the area in which the property

is located with latitude and longitude
b) Building Plan & Floor Plan
c) Certified copy of the approved / sanctioned plan
wherever applicable from the concerned office
d) Photograph of the property (including geo-stamping
with date) including a “Selfie’ of the Valuer at site
e) Google Map location of the property

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ANNEXURE- 2

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Length Area

1 mile = 1760 yards 1 sq. mile = 640 acres

1 mile = 8 furlong 1 acre = 4840 sq. yard
1 furlong = 10 chains 1 sq. yard = 9 sq. feet
1 chain = 4 rods 1 sq. foot = 144 sq. inches
1 rod = 5 1/2 yards 1 km2 = 100 hectare
1 yard = 3 feet 1 hectare = 100 ares
1 foot = 12 inches 1 are = 100 m2
1 mile = 1.609 km 1 sq. mile = 2.59 km2
1 yard = 0.9144 m 1 acre = 0.4047 hectares
1 foot = 0.3048 m 1 acre = 4046.86 m2
1 inch = 25.4 mm 1 sq. yard = 0.8361 m2
1 km = 0.6214 miles 1 sq. foot = 0.0929 m2
1 m = 1.0936 yards 1 sq. inch = 645.16 mm
1 m = 3.2808 feet 1 km2 = 0.3861 mile2
1 mm = 0.0394 inches 1 km2 = 247.105 acres
1 hectares = 2.4711 acres
1 m2 = 10.7639 feet2
1 mm2 = 0.0016 inches2

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