Principles & MethodsofValuation of Real EstateNational Institute of Real Estate Management2nd August, 2013

Rs.7499/-Rs.7500/-

Rent Control Act : CaseKrishna Laxman Yadav Vs.Narsinghrao Vithalrao Sonawane 1973MhLJ225 AIR1973Bom358, (1973)75BOMLR29, The Respondent No.1 owns a house bearing City Survey No. 24 situate at Somwar Peth, Poona. The house consisted of different small tenants on the ground and two floors. The Petitioners Nos. 1 to 7 occupied different tenements at monthly rents. In consequence of the Panshet floods which occurred on 12th July 1961, the house was flooded with waters and excessively damaged. By a notice given in August 1961, the Municipal Corporation of Poona directed the Respondent No.1 to remove first and second floors of the house as being dangerous to human life. The tenants claimed that the notice should be withdrawn but the Corporation refused to withdraw the notice. A large part of the house fell down in November 1961 and the Municipal Corporation ultimately removed the house to level of the plinth and called upon the Respondent No.1 to remove the debris. After the debris was removed, the Respondent No.1 completed the formalities of having a plan sanctioned and commenced to construct a new building at the site of the old house. The Petitioners thereupon filed the above suit in the end of April 1962, claiming a declaration that their tenancies had not been extinguished and they were entitled to occupy as tenants in newly constructed tenements at the place equivalent to the original tenements occupied by them.

ValuationValuation as an Art and Science is an exercise falling within the domain of Economics and Law.Is Valuation Art or Science ?

Valuation as viewed by the Supreme CourtValuation as explained by the Supreme Court in case of Administrator General of W.B. vs Collector, Varanasi[AIR 1988 SC 943].The determination of market value of a land with potentialities for urban use is an intricate exercise, which calls for collection and collation of diverse economic criteria. The determination of market value is the prediction of an economic event, viz. the; price-outcome of a hypothetical sale, expressed in terms of probabilities.

VALUATIONValuation is a multi-disciplinary subject involving following disciplines over and above valuation.

Valuation Profession in IndiaGovt. registration under Sec 34AB of the Wealth Tax Act. (Real Estate) Qualification of Registered valuer for immovable property (other than agricultural lands, plantations, forests, mines and quarries) is given in Rule 8A.Be a graduate in civil engineering, architecture or town planning + 10 years experience ORBe a post graduate in valuation of Real Estate from recognised university + 2 years experience.

Valuation Profession in IndiaGovt. registration under Sec 34AB of the Wealth Tax act. (Plant & Machinery)Qualification of Registered valuer for machinery and plant is given in Rule 8A.Be a graduate in Mechanical, or Electrical engineering + 10 years experience ORBe a post graduate in valuation of Plant and Machinery from recognised university + 2 years experience.

Valuation Courses in IndiaMaster of Valuation (Real Estate)Master of Valuation (Plant & Machinery)-unique PG course available in the whole world.Centre for Valuation Studies, Sardar Patel University, Vallbha Vidya Nagar, Anand, Gujarat. http://www.spuvvn.edu/admissions/courses.html

Master of Valuation (Real Estate)Shivaji University, Kolhapur, Maharashtra under distance learning. www.unishivaji.ac.in

Purposes of ValuationDifferent Fiscal PurposesRatingStamp dutyIncome tax-Wealth tax & Gift tax -as per schedule IIICapital gain taxCourt feesSuites for recovery of possession of propertySuits for partitionSpecific performanceProbate and letter of administration

Purposes of ValuationStatutory and Different Non-fiscal purposesLand acquisition.Insurance.Merger, Amalgamation, Take-overs and Dis-investment.AuctionMortgageBetterment levy for planning regulation.

Valuation under Land Acquisition Act 1894Point to be consideredMarket Value as on Section 4(1) notification date.Damages for severance of other land.Injurious affection of other property in any other manner or his earnings.Expenses incurred for change of residence or place of business as a result of acquisitionDamages to standing crops or trees.Bona fide damages caused from diminuation of profits of land from the date of declaration u/s 6 & taking possession. Solatium @ 30% of Market Value

Valuation under Land Acquisition Act 1894Point not to be consideredDegree of urgency for acquisition.Any disinclination of the party in parting with the land.Damages caused by private party is not actionable.Damages caused by its user after declaration u/s 6.Any increase in value of the land acquired or of the other land of the same owner likely to accrue as a result of future use of the acquired land.Outlay, improvement made to the land notified u/s 4(1) without sanction of the Collector.

VALUE : Estimate of priceas it ought to be.TypicalbuyerPropertybeingvaluedValue as compared to Cost and Price

Value in use (Utility)+Scarcity+ Transferability= Value in exchange

Value in exchangeValue in exchange is the price that would tend to prevail in a free, open and competitive market on the basis of equilibrium set by the forces of demand and supply.

The market value is a common form of value in exchange which is used very frequently.Market value has been defined as the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Market value (value in exchange)

Different types of valueSentimental Value Investment ValueMarket ValueReversionary ValueLiquidation or Forced Sale ValueSalvage Value

Different types of valueSentimental Value(1975) >Rs 30,00,000/- Investment Value(1975) Rs 20,00,000/- Market Value (1975) Rs. 18,00,000/- Distress Value Rs 16,00,000/-Liquidation or Forced Sale Value Upto Rs. 9,00,000/- Salvage Value Rs 1,80,000/-

What is Real Estate? Real estate is defined as the physical land and those human made items attach to the land It is physical, tangible thing which can be seen and touched, together with additions on, above, or below the ground.

How the value of real estate is being created?Value is created by real estates utility, or capacity to satisfy the needs and wants of humans. The factors, which contribute to value of the real estate, are its general uniqueness durability, fixity of location, relatively limited supply, and the specific utility of a given site.

The key criterion relating to the valuation of any real property is its utility. All the valuation processes have the common objective of defining and quantifying the degree of utility or usefulness of the property being valued. How the value of real estate is being created?

How the value of real estate is being created?Accordingly, land value is established by evaluating its utility in terms of the legal, physical, functional, economic, and environment factors, which govern its productive capacity. Fundamentally, property valuation is governed by the way specific property is used and/or how it would ordinarily be traded in the market.

What constitute the Real PropertyReal property includes all the rights, interest, and benefits related to the ownership of real estate. Therefore real property is a non-physical concept. Ownership of an asset is itself an intangible.

Highest and best useThe most probable use of an asset, which is physically possible, appropriately justified, legally permissible, financially feasible, and which result in the highest value of the asset being valued.A use, which is not legally permissible or physically possible, cannot be considered a highest and best use.

The concept of highest and best use is an integral part of Market Value estimate.Highest and best use

Types of propertyMovable property : Anything which can be moved or carried from one place to another without destroying its basic characteristic is a movable property.Immovable property as per section 3(26) General Clause Act: immovable property shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.

Types of propertyMovable property : Anything which can be moved or carried from one place to another without destroying its basic characteristic is a movable property.Immovable property as per section 3(26) General Clause Act: immovable property shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.

Principle approaches of valuationIncome approachIncome capitalization methodDiscounted Cash Flow (DCF) methodCost approachReplacement Cost New (RCN) method (for P & M)Land & Building method (for real estate)Market approachSale comparison method

Mathematics of ValuationY.P.=Years Purchase=R=Rate of interestn=Numbers of yearsC=Net capital income (Annuity) received each yearValue of asset=C x Y.P.

For n 100 formula of YP = 100/RValue of asset=Cx100/R

Example if n=10 years

Monthly rentAnnual rentYP as aboveMarket Value470005,64,0007.2741,00,000750009,00,0007.3666,24,00011500013,80,0007.631,05,29,00018200021,84,0007.631,66,63,00028500034,20,0007.722,64,00,00046000055,20,0007.023,87,50,00060000072,00,0006.144,42,08,00012600001,51,20,0006.289,49,53,000

Present Value of Rs. 1 P. A.

Example if n=100 years or more

Monthly rentAnnual rentYP= 100/RMarket Value470005,64,00015.9389,84,500750009,00,00016.671,14,03,00011500013,80,00019.042,62,75,00018200021,84,00019.044,15,83,00028500034,20,000206,84,00,00046000055,20,00014.297,88,80,00060000072,00,000107,20,00,00012600001,51,20,00010.5218,14,40,000

Present Value of Rs. 1 P. A.

Mathematics of ValuationDual rate YP = S =R=Return on Capitalr =Return of Capitaln=Numbers of yearsC=Net capital income (Annuity) received each yearValue of asset=C x Y.P.

Dual Rate YP

Valuation of Industrial UnitThe procedure to be followed for valuation by the Replacement Cost New methodComputation of RCNComputation of depreciation including obsolescenceComputation of Net Current Replacement.

Types of Built-up properties

Hotel buildings, cinemas andnursing homesSchool, colleges and hospital buildingsSpecial properties (town hall, marriage hall etc.)Projects for development of complexes for Residential Commercial and Industrial usesAny other type of the property notcovered aboveRented (Commercial / Residential units)

Types of Built-up properties

-Area and shape of land -Dimension of each side of the plot and ratio of depth to frontage-Frontage on roads and widths of roads -Demarcation of land -Soil bearing capacity, foundation conditions, level of land and cost of levelling if any -Tenure of land Is it Freehold or Lease-hold land? Descriptive and detailed information should furnished in the valuation report. Valuation of open or built-up land

- In case of lease hold land :-

-Name of Lessor-Name of Lessee-Date of commencement of lease-Period of lease-Date of termination of lease-Premium paid-Ground rent per annum

Valuation of open or built-up land

Covenants of lease with regards to following points be mentioned in the valuation report of the subject property with their effect on the value of thesubject property.Valuation of open or built-up land

- Termination of lease-Renewal of leasePayment of unearned increase in the event of sale or transfer-Conditions of transfer-Conditions of Mortgage- Any other important clause which may change / affect the use or value of the subject property

Valuation of open or built-up land

Valuation of open or built-up land- Is land affected by Land Reforms Act, Revenue Code of the State Government? Furnish details.-Zoning of land as per Master Plan/DP/TP-Development Plan/Master Plan/Planning proposals affecting the land such as reservation for public purpose like health facilities, playgrounds, recreation garden, road widening, new road, transport facilities etc. Give details, if any.

Valuation of open or built-up landWhat is permissible FSI/FAR? How much is it utilised? Other D.C. rules, Bye-laws affecting land values be mentioned in the valuation report of the subject property.Is there any outstanding liability for property tax, income tax or any other taxes, levies that can be recovered by attachment of property.

*Collect data regarding sale transactions in the vicinity. *Give appropriate weightages with regard to following factors to each sale instances and property to be valued. *Compare the sale instances with property in question with regard to following factors and prepare an analytical report.Valuation of open or built-up land

Appropriate weightages to be given to the following factorsBuilding Physical factors of land LocationSocialEconomic LegalUtilityTransferability

Building Situation in floor, Built up area in sq. m.,FSI consumed in percentage,FSI balanced in percentage, Construction quality, Specification for material, Architectural aspect, Light and ventilation, Maintenances etc.

Physical factors of landArea in sq. m., Shape, Frontage in feet, Frontage on roads, Ratio of depth to frontage, Level, Drainage, Soil for depth of foundation, Water table depth in metre etc.

Unique Transactions1112 sq yd of bungalow in LBZ was sold for Rs 111 Crores.In Shanti Niketan bungalow sold for Rs 170 Crores.On Mansingh Road a bungalow was sold for Rs. 150 Crores.

Unique TransactionsATS infrastructure bought 14 acres plot in Gurgaon for Rs. 150 Crores.DLF sold 24.7 acres plot in Gurgaon for Rs. 400 Crores.18 acres land in Bandra Kurla Complex sold for Rs. 831 Crores13 acres land in Gurgaon sold for Rs. 620 Crores.3 acres plot in Delhi sold for Rs. 635 Crores.

Unique Transactions6.18 Lakhs sq. m. land bought in Sec. 32 & 25-A Noida for Rs. 6568 Crores.-25000 sq. m. land in Wadala, Mumbai sold for Rs. 4053 Crores340 acres of land in Noida sold for Rs. 1582.83 Crores.1750 acres of land in Vishakhapatnam sold for Rs. 3328 Crores.

Location Including nearness to amenities and facilities like Educational, Health, Shops and markets, Transportation, Municipal services etc.

Social Type and class of locality, Cleaning habit of the residents, Anti-social elements in the building or in the vicinity etc.

EconomicEconomic status of residents, Prevailing rent of accommodation ( commercial / residential ), Prosperity of the areas as revealed by shops, markets, business establishments etc.

Utility Utility and potential use permissible under Zoning regulations published by the Municipal Authority / Development Authority.

Transferability Any condition or restriction regarding transfer of title such as payment of Unearned increase, pre-emptive right etc. should be considered.

Legal No legal title, Short term lease, Long term lease, Freehold, Rented, Permissible FSI, Marginal open space etc.

Valuation of Propeteis : Unique cases

NoDescriptionArea in cents(40.47 sqm)Rate in Rs/cent1dated 8/09/2006 1351,85,000/-2dated 25/05/2006453,00,000/-3dated 30/10/200650300,000/-

Land Use: CaseState of U.P.Vs. Widow of Late L. Janki Das AIR1966All273, MANU/UP/0097/1966An area of land, measuring 19.99 acres belonging to several proprietors and situate in Lekhraj Muzbita within the Municipal Limits, was acquired under a notification dated 29th January, 1950, for the rehabilitation of certain refugees.

The Land Acquisition Officer calculated the value of the land treating it as agricultural land. He also allowed some compensation for trees, wells and the constructions.

The fact that the land which has been acquired was entered in the revenue papers as agricultural land and was being used as such will not mean that it could not be treated as a potential building site. The law on the subject is clear. It was held in the case of Narasingh Das v. Secy. of State MANU/PR/0026/1924, that the principle upon which valuation of property compulsorily acquired should be measured is the value to the seller of the property in its actual condition at the time of expropriation with all its existing advantages and with its possibilities.

Valuation of Propeteis : Unique casesProperty under sale :date of sale =06/01/2012, area of land =9478 sqm., land rate=Rs. 1730/- per sqm.)Property under sale instance date of sale =11/10/2011, area of land=6398 sqm., land rate=Rs. 1875/- per sqm.Property under sale instancedate of sale =12/01/2012, area of land=6291 sqm., land rate=Rs. 2570/- per sqm.

LegalProvisions of the Ancient Monuments and Archeological Sites and Remains Act 1952.100 m from protected monument is prohibited area200 m from protected area is regulated areaIndian Electricity Rules, 1956.Vertical clearance :- Up to 33KV-3.7 m plus 0.3 m/33 KVHorizontal clearance :-Up to 11 KV -1.2 mUp to 33 KV 2.0 m plus 0.3 m/33KV

************Value as compared to cost and price************We value the rights and interests in the property(present value of these future benefits.**************************