General Principles for Valuation of Building

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In the valuation of buildings, the usual method employed is to ascertain the prime cost of a building and to deduct therefore depreciation to give the present day market value. The prime cost is the value a similar structure will cost to erect taking into account all the ornamental features which have a market value.

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Courtesy - 123rf

Depreciation:

Depreciation is the decrease in value of the property due to wear, tear, decay and obsolescence. The depreciation cost is worked out on the basis of its cost of reproduction at the present time and deducting, therefore, the necessary depreciation for the age passed, as well as the cost of the immediate structure and general repairs.

Approach:

For valuation of buildings, generally, the cost approach is adopted. In cost approach, several engineering methods have been employed in estimating the building cost such as unit in Place methods or inventory of the quantities of material and labour, plinth area and cubical content methods, which generally depend on the total length of exterior and interior walls, height of each floor, the type of the structure i.e. R.C.C framed structure or wooden framed structure or load bearing walls type, type and number of doors and windows and fittings used, nature, area and type of roof, floor, quality of water supply and sanitary fittings, quality of electrical fixtures, type of finishing, architectural, ornamental and decorative features, age of the building, the original cost of construction of building, cost of major capital repairs carried out, if any, the maintenance of the building, present condition of the building, general wear and tear of the building, cost of major immediate capital repairs required if any, efficiency of carpet area, parking facilities, general light and ventilation conditions of the building, the orientation with respect to windward direction, flow of natural air, quality of materials and workmanship etc. It also depends on services available like water supply, drainage, electricity, underground water tank, overhead water tank, pumps, provision of borewell, type of electrification, compound wall and gate approach road, provision of lift, capacity to raise further floors over the existing buildings etc.

Also Read: Principles for Valuation of Urban Land

Factors on which value of Building depends:

In general, in arriving at the estimated market value, one should take into consideration, inter alia, the following factors:

  • The present depreciated value of the building, its age, and useful economic future life.
  • The prevailing value of the land similarly situated round about this area.
  • The situation, shape, size, topography, elevation and frontage of the plot of land.
  • The extent of end use and utility.
  • Services available such as schools, market, hospitals, recreation centres, parks etc.
  • Communication and transportation facilities such as posts, telegraphs, telephone, electricity, roads, railways, buses etc. and their locations in the vicinity.
  • Type of locality i.e. industrial, residential or commercial and also the status of locality i.e. poor class, middle class or upper class.
  • Predominant character of the neighbourhood area.

According to new emerging and developing concepts in building construction industry, all buildings are not equal. No longer are buildings dismissed as simple dumb things. Instead, they are capable of acquiring different intelligent levels through the planned installation of modern amenities along with usual facilities like lighting, water and sanitary installations, elevators etc. The office and residential complexes are now having services like common EPABXs, photo copying machines, shared computers, mobile network, data network, Wi-Fi and dish antenna. In most cosmopolitan areas, shared computers, Wi-Fi, tele/video conferencing services, common reception halls and receptionist etc. are becoming popular. What is stressed here is multifarious considerations are there to be taken into consideration in determining the value of an asset of the nature of a building and there cannot be a single formula or set of rules to assign the acceptable quantum of money that the building is worth. The concept of smart building will lead the whole building science and concept of valuation to a new horizon in few years.

Also Read: What are the Different Purposes for Valuation of House?

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