CAIIB RB Unit 24 - Valuation of Real Property

Valuation means assessment of the worth of an asset or property. It is distinct from cost, which refers to the actual amount spent in producing an asset. Cost is related to the past while value refers to the future.

The Income-tax Department grants registration to Valuers u/s 34AB of the Wealth Tax Act, 1957, on the basis of their technical background and experience. For the purpose, the Deptt. has classified Valuers under separate categories those for

1. Immovable property
2. Agricultural land
3. Plant & machinery
4. Jewellery

Types of Real Property

Agricultural land

The factors that influence the return from agricultural land are :

1. Location
2. Soil quality
3. Availability of water & electricity
4. Size of holding
5. Clear Title of land
6. Access by road and approaches
7. Cottage or Farm house, fencing and gates
8. Types of crops that can be cultivated

Valuation of agricultural land is done by following two methods :

1. Income Capitalisation Method
2. Sales Statistics Method

Urban land

The factors that have a bearing on value of vacant land are:

1. Location
2. Size, shape and level
3. Soil quality, water availability
4. Frontage & depth
5. Restrictions on development
6. Encumbrances

Valuation of open land is done by following methods :

1. Comparative Method
2. Rent Capitalisation Method
3. Belting Method

The methods used for valuation of land with building are:

1. Comparative Method
2. Rent Capitalisation Method
3. Valuation based on profits
4. Valuation based on cost
5. Development Method

Valuation of specialized buildings - Valuation is based on capitalization of average net profit over past couple of years at appropriate rate of interest. This method is also known as the balance-sheet method.

Sinking Fund

The fund set aside for the purpose of recovering the original capital is called sinking fund. The amount to be regularly set aside out of annual income to create the sinking fund depends on the compound interest it is supposed to earn over the life of the structure.

Depreciation

Depreciation means loss in value. A building also loses value due to obsolescence. There are several methods to calculate depreciation but the following two methods are usually adopted :

Straight Line Method

In this method, the depreciation is allocated uniformly over the life of the property and is generally adopted for tax purposes and preparing financial statements. The annual depreciation is given by:

D = (C-S) / n

Where,
D is annual depreciation
C is original cost,
S is salvage value (value that property may fetch at the end of useful life)
n is life of building in years

Written Down Value (WDV) Method or Declining Balance Method

In this method, it is assumed that the property will lose value by a constant percentage of its value at the beginning of the year. Thus, the amount of depreciation goes on reducing every year because while depreciation is charged at fixed percentage, the capital value of asset decreases by depreciation charged every year. The WDV of an asset can be found out by the formula :

WDV = C(1-p)^n

Where,
C being original cost
n being life in years
p being the percentage at which depreciation is charged