WORKSHOP ON VALUATION REAL ESTATE AND PLANT & MACHINERY ORGANISED BY CENTRE FOR VALUATION STUDIES ISTAR, VALLABH VIDYANAGAR SATURDAY, 14th DECEMBER 2013

Fundamentals of Valuation By Rupesh T. Shah B.E.(civil) M.V.(RE) LL.B.(Sp.) F.I.V., M.I.E., M.I.S., CE(I) Asst. Prof., ISTAR Vallabh Vidyanagar

Valuation it is not as simple as we think it is not simple multiplication of area and rate it requires knowledge of: basic principles of valuation micro and macro economics planning laws and development control regulations

land economics construction technology and cost estimation surveying and land measurement various laws relating to immovable properties governing their - transfers, tenancies, acquisitions, taxations etc. environmental laws and regulations judgments of courts in some landmark cases

Valuation is a complex process of estimating monetary value of the property rights as on valuation date, for given purpose taking in to account cumulative effect of various factors affecting the value

Immovable property comprises of bundle of rights such as: free hold exclusive ownership right lease hold property - lessor’s and lessee’s interest mortgaged property - mortgagor’s and mortgagee’s interest easement rights rented property – landlord’s and tenant’s interest

Fundamental 1 Valuation is of legal rights, interests and benefits and not merely of physical entities, and value is present worth of future benefits checks in case of a freehold tenure encumbrances like – tenant, easement right, charge etc. checks in case of leasehold tenure total and balance period of lease and lease covenants checks in case of rented property whether the tenant is protected under rent control Act or not

Fundamental 2 Value varies with purpose Fiscal purposes (mostly statutory valuation) Wealth Tax Income Tax Capital Gain Tax Stamp duty

Non-fiscal purposes Buying/selling market value Bank loan/security market value, forced sale value Land Acquisition market value and other additions as per the Land Acquisition Act in force Revaluation of assets/accounting purpose fair value/market value as per the prevalent financial reporting standards

Insurance replacement/reinstatement cost of the building Town Planning Schemes original plot value and final plot value – before and after method Liquidation open market value and forced sale value Buying/selling of a running business going concern value Family partitions, visa and other miscellaneous purposes Market value

Fundamental 3 Four Value ingredients Utility Scarcity Demand Transferability

Fundamental 4 Four factors affecting value Economic factors Macro economic Micro economic Govt. policies Interest rates Boom-recession cycle Demand and supply Income level in the locality Prices of building materials

Legal factors title and tenure of the property land use zoning and other relevant development control regulations encumbrances over the property if any - like seating tenant, liability/charge, easement right pending litigation if any

Social factors availability of civic facilities such as water supply, sewerage disposal, street lighting, solid waste disposal etc. availability of infrastructure facilities such as road, power supply, communication etc. availability of social infrastructure such as schools and colleges, play grounds and gardens, religious and recreation places distance from market and shopping, bus and railway stations, local bus stops etc. neighbourhood and development in the surrounding area

Physical/technical factors For land: size, shape, topography and soil condition of land and climatic condition in the locality For building and other improvements: type and quality of construction, specifications, age of the building, condition and level of maintenance, repairs required if any floor level amenities provided

Approaches of valuation Considering type of property and purpose of valuation, above mentioned factors shall be considered for valuing the property by any of the relevant approaches mentioned below: Market approach Income approach Cost approach

Summary Four value ingredients Four factors of valuation Value is present worth of future benefits Valuation of immovable properties is valuation of legal rights, interests and benefits Four value ingredients Four factors of valuation Three approaches of valuation Utility Scarcity Demand Transferability Economic Legal Social Physical/technical Market Income Cost