CAIIB-Retail Bank-MOD-E-Valuation of Real Property Unit - 23 : 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 : Immovable property Agricultural land Plant & machinery Jewellery
Types of Real Property Agricultural land The factors that influence the return from agricultural land are : Location Soil quality Availability of water & electricity Size of holding Clear Title of land Access by road and approaches Cottage or Farm house, fencing and gates Types of crops that can be cultivated
Valuation of agricultural land is done by following two methods : Income Capitalisation Method Sales Statistics Method
Urban land The factors that have a bearing on value of vacant land are: Location Size, shape and level Soil quality, water availability Frontage & depth Restrictions on development Encumbrances
Valuation of open land is done by following methods : Comparative Method Rent Capitalisation Method Belting Method
The methods used for valuation of land with building are: Comparative Method Rent Capitalisation Method Valuation based on profits Valuation based on cost 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