PRINCIPLES OF PROPERTY VALUATION

Fair Market Value (FMV) / Open Market Value (OMV):

Price is a fact, value is an estimate what the price ought to be and worth is what it is worth to an
individual.
FMV / OMV is if one sells in open market under normal condition what it would fetch that has to
be construed as FMV / OMV. The transaction is between a willing buyer and a willing seller.
Market Realizable Value (MRV): is the amount reasonably receivable from the sale of a
property within shortest period in a transparent transaction and the bidder has to pay the
remaining amount of the offer in short period as per the condition of auction upset value and in
addition to that, the Forced Sale Value further depends on local real estate market driving
forces.
It is the property type that determines method, not the purpose of the valuation.
Cost Methods:
Land and Building Method: Market Value of land is added to the depreciated reproduction
cost of the building (The present value of the building), the result is value by land and building
method. Market Value of land is assessed by comparable sales method proximate in time and
type. Construction rates applied is based on CPWD or States PWD based rates for estimation
purpose. This method is also known (aka) as Cost Method
Contactors Method: This method is used for properties usually not bought and sold for
technical (accounts or statutory) purpose only.
Reproduction cost minus depreciation plus value of land. For land value Registrars guideline
value can be adopted.
Land plus break-up value of the structure: When the property has outgrown its utility and it is
reasonably in capable of economic use, it may be valued as land plus the break-up value of the
structure (R.C.Kooper vs. Union of India vide 1970 A.I.R S.C.564).
Reinstatement Valuation: Reinstatement is the act of restoring something exists again to a
previous position. Replacement coverage is designed to replace or rebuild a property with
similar type and specifications in the event of a loss, equal to its condition when new. The
doctrine of pro prorate average applies, which is if at the time of reinstatement or replacement,
their cost exceeds the sum insured at the time of loss, it is deemed to be underinsurance and
insured has to bear a ratable portion of the loss. The cost of land is not included.

Development Method or Residual Method: This method is used in those circumstances

where the existing building value can be increased after carrying out development works. For
example an old house has a potential to convert into an apartment buildings, the building is
valued on the basis of its future worth after conversion. The cost of this work with developers

profit is deducted and the result is value of the property in its original state and is known as its
residual value.
Income Methods:
Rental Method / Rent Capitalization Technique: Net rental income is capitalized by a years
purchase. The security percent is market derived. When a property is valued by Rental Method,
value by Land and Building Method also is declared. When valued for Fair Rent, fair rent
formula can be applied to the value arrived by land and building method and that gross is the
ceiling.
(Supreme Court) It can not be laid down as a general rule applicable to all situations and
circumstances that a multiple approximately equal to the return from gilt-edged securities
prevailing at the relevant time forms an adequate basis for finding out the market value of land,
(State of Kerala Vs P.P.Hassan Koya-A.I.R. 1968 (Supreme Court) 1201.
Account or Profit Method: Commercial properties like Cinema Houses Hotels, Cold Storages,
etc. are valued in consideration of their potentialities to produce income. Gross income less
outgoings consisting of collection expenses, repairs, sinking fund to redeem capital assets, etc.,
are capitalized with market derived security percent or years purchase to determine the market
value. When a property is valued by Profit Method, value by Land and Building Method also is
declared.
Hypothetical Building Scheme: This method considered as the basis of market value
provides evidence of a remote speculative and conjectural character. (Case of Ragunath Das 11
CLJ 612).
Market value of the site is assessed by deducting the total cost of hypothetical structure
including interest for capital outlay for an average period of construction from the market rental
value of the scheme. Construction of building floor plate area hypothetically done respecting
local building rules.
Valuation of Building Estates: It is based on the principle as laid down in Government of
Bombay vs. Karim Tar Mohamed. I.L.R. 33 Bom. 325; The owner in claiming compensation can
seek to prove either what the property would fetch, if sold in one block, or what is the present
value if he plotted out the property and sold in lot.
Land must be valued at its best and most advantageous manner and if an estate is worth more,
if sold in plotted layout, it can be laid out. Normally it will take time. Present value of estimated
realization is deducted for adventurers share @ 20 percent; that amount is further deducted to
the present value of cost of road making, and other modern infrastructures cost, plus
engineering supervision charges, legal charges, advertisement and brokerage; the result is
value of estate.
Valuation of Building Estates
What is the present value of ABC estate which is now ripe for building development? The
estimated cost of engineering works complete is INR 1,20,00,000/-. The estimated gross return
from lands available for immediate sale is INR 6,00,00,000/-. 15 grounds of land worth INR
45,00,000 will not be sold immediately but reserved for commercial purpose.

Valuation Tables can be referred in ^

258259.asp

http://www.caclubindia.com/forum/valuation-tables-

Description
Estimated gross return, Say A

INR
6,00,00,00
0

Part of it will be received immediately and the last sale is expected in 4 years
time, therefore defer the gross return for half the period, i.e. 2 years @ 7% Say
B (From the Tables)

0.873

Present value of estimated part realization A x B = 6,00,00,000 x 0.873 Say

C

5,23,80,00
0

Value of 15 grounds which may not be sold for 4 years. Present value for 4
years @ 7% for INR 1/- Say D (From the Tables)

0.763

Value of unsold lands in 4 years: Say E

45,00,000

Present value of unsold lands D x E

34,33,500

0.763 x 45,00,000 Say F

Present value of estimated realization C + F Say G

5,58,13,50
0

Deduct: Developers risk and profit at 20% of G Say H

1,11,62,70
0

Engineering works Say I

1,20,00,00
0

This will take 4 years, therefore defer for half the period. i.e. 2 years at 7% Say
J

0.873

Present value of engineering works I x J Say K

1,04,76,00
0

Engineering and Supervision charges say 7% of G Say L

39,06,945

Legal expenses , Brokerage, etc. say 5% of G Say M

27,90,675

Advertisement cost Say N

1,50,000

H + K + L + M + N say O

2,84,86,32
0

Value of estate (G O)

2,73,27,18
0

In the authors opinion, in layouts, Roads area requires a minimum of 20 percent. Normally
under development control rules a minimum of 10 percent area is to be reserved for open space
reservation for land extent exceeding 10,000 sm or 1,07,643 sf or 1 hectare area for plotted
development.

The catena of decisions relating to the compensation in land acquisition case would mandate
that sales relating to small pieces of lands, if they are genuine and reliable and comparable to
the land acquired, the same could be relied on.
Under the land acquisition cases of Land Acquisition Act 1894, when comparable sales
instances of small pieces of land are relied upon to a vast strip of land, the deduction for
development charges allowed is from 33 to 53% percent as approved by the Madurai Bench of
Madras High Court in Thanjavur Air Field Case. A vast piece agricultural land was acquired for
Thanjavur Air Field. In assessing the market value small pieces of residential comparable sales
instances were relied upon. The award is:
1/3

1). the value of land acquired:

Rs. 1,744.00 per one cent

2). 53% deduction towards development charges:

3). the net value of land for awarding compensation:

Rs.
Rs.

924.32 Per one cent

819.68 Per one cent

One cent = 435.60 sf; the value of land acquired was Rs. 4 psf and the net value of award is:
Rs. 1.88 psf.
The Madurai Bench of Madras High Court has allowed 53% and the Supreme Court has
allowed 63% on the facts and in the circumstances of the case in K. Vasundara Devi vs. RDO,
LAO ((1005) 5 SCC 426)) towards deduction for development charges. Source: Source: ^
http://judis.nic.in/judis_chennai/qrydispfree.aspx?filename=52554

In LAO vs. Adhi Narayana Setty (AIR 1959 SC 429) mandated method of valuation:
1). Opinion of experts
2). The price paid within a reasonable time in bonafide transaction of purchase of the lands
acquired or the lands adjacent to the lands acquired and possessing similar advantages, and
3). A number of years purchase of the actual or immediately prospective profits of the land
acquired. (AIR 1959 SC 429).
Land value depends on its size, shape, location, abutting road width, and the land use to which
it is put to use and has to be valued with all its potentials and advantages. Based on Chennai
Building Rules as per the Second Master Plan 2026, building types, minimum land area
required and its potentials are furnished below for Chennai City, excluding continuous building
area.

Building Type
(1)

Min.
Abutting
road width
in feet

Min.
Land
area in
sf

(2)

(3)

Min. Plot
Size in feet
Frontage x
Plot Depth
(4)

Total built-up
area
permissible in
sf
(5)

Ordinary Residential building

20

860

20 x 45

1290

Ordinary Commercial building

23

861

20 x 45

1290

30 to 33

3,229

30 x 110

4,845

Special building commercial

26

2,153

26 x 82

3,300

Group Development

33

7,104

40 x 180

10,660

Multi storey building (MSB)

40

12,917

82 x 157

19,376

MSB Cat 1 (b)

50

12,917

82 x 157

22,606

MSB Cat II

60

16,146

82 x 197

32,293 to 40,266

MSB Cat III

100

26,911

131 x 205

53,821 to 67,277

Special building residential

(this is minimum category
available; Maximum FSI is 1.5)

Cat I (a)

The belt size in column 4 above is the size that can be called as 1 belt and value of land
depends on its potentials. The first belt is minimum requirements to qualify to that category of
building type. Any area in excess in the rear side, its value will be less than the first belt. The
value has to be decided according to its size, shape, access available and based on prevailing
evidences and circumstances.
st

Formula for compensation by Tamil Nadu Government vis-vis the same compensation by valuation by belting method
A piece of land admeasuring 40 x 6 feet was acquired for road widening by Tamil Nadu
Government in Chennai City in July 2012. The total land extent is 2,400 sf (40 feet
frontage and 60 feet plot depth). The potentiality of the land is a G +2 residential
building can be constructed to accommodate six dwelling units. FSI permissible is 1.5.
Market value of land is INR 8,000 psf and guideline value (GLV) is INR 6,000 psf.
TN Government formula for minimum compensation for the above category: 1 sf land
will be awarded 2.25 sf of built-up area and its worth in terms of land value 2.25 / 1.5 x
Guideline value. Compensation payable in land value terms: 2.25/1.5 x 6000 = INR
9,000 or 6 x 40 x 9,000 /6 = 3,60,000 per foot depth (pfd) and total compensation in
land value terms worth INR 21,60,000/=
Hypothetical Valuation by Belting Method:

Within 40 x 60 feet land, the first belt is 40 x 6 feet and the second belt is 40 x 54 feet.
Total land value is INR 19,20,00 (40 x 6 x 8,000) and pfd is INR 3,20,00 pfd i.e.
(19,29,000 / 6). The second belt is considered @ 3,20,000 x 0.875= INR 2,80,000 pfd
Valuation by belting method: (60 x 3,20,000) (54 x 2,80,000) / 6 = INR 6,80,000 pfd
and total compensation is INR 40,80,000/=
If 3/4 of the first belt is assumed pfd is INR 10,40,000 and compensation is INR
62,40,000/=. In such a situation value arrived by Government formula can be
considered as a benchmark, the nearest would be 0.975 and pfd value is INR 3,92,000
and compensation value is 23,52,000/=.
th

As per belting method of valuation, if we consider 40 x 60 is the first belt, the reasonable
second belt at the recess would be valued at 3/4 of the first belt and 3 belt at 2/3 of the
first belt. In Secretary of State for India in Council vs. Bhupati Nath Deb CLJ 90, it was
held that land in recess are generally priced at 3/4 value of similar plots in
corresponding belts. In Anantham Pillai vs, State of Kerala 1961 LJ 723, it was held
that such a method (Belting Method) can be restored to only in cases where extensive
lands having road only on one side is to be valued.
th

rd

th

Indian Property Valuation Practice

International Valuation Standards:

(supra)

vis--vis

International Valuation Standards (IVS) are formulated by the International Valuation

Standards Council (IVSC) to guide the International Valuation required Community,for
the appropriate use of valuation approaches to two defined classes of assets in
Property, Plant and Equipment (PPE); they are Non-Specialized and Specialized
assets.
Market value is the estimated amount for which an asset or liability should exchange on
the valuation date 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.
Non-Specialized assets are properties commonly bought and sold in the open market
and In Specialized Properties transactions are infrequent and when they occur, the
assets are often sold as a part of a going concern business.
Three Valuation Approaches: 1). Comparable Sales Approach (CSA), 2). Income
Approach (IA) (Income Capitalization Approach and Discounted Cash Flow Approach
(DCF) & 3). Cost Approach (CA) aka DRC Approach (DRCA) (Depreciated
Reproduction and Depreciated Replacement Cost Approach = DRC).

Non-Specialized properties are valued by CSA and in those circumstances market

derived data like direct market rents are relied upon, valued by IA.
Specialized properties are valued by IA where applicable and CA.
Only where the future economic benefits of any asset are primarily depends on its ability
to generate net cash inflows should the income approach be applied.
In DRC approach, Replacement Cost is appropriate, which is the current cost of a
similar asset having the nearest equivalent utility as the asset being valued.
Reproduction Cost is the current cost of reproducing a replica of the asset being valued
using the same or closely similar material.

Valuation:
I. DRCA 1: Market Value of land in its existing use plus DRC
DRCA 2: Market Value of land in its HIGHEST AND BEST USE (HABU) plus DRC;
when valued by DRCA 2, if market value of land is greater than total value of DRCA 1,
the land value of DRCA 2 is the Valuation result.
II. In some cases, if a specialized property is purchased and put to different use (as
permissible by local authority), due to changing trend in the market, the market value is
higher of:
1). the value of land for alternative use minus cost of demolition complete, or
2). DRC for the same use plus cost of land in its existing use.

When a property is valued by multiple approaches of valuation (CSA & IA), that
valuation is to be cross checked with DRCA.

The IVS is not mandatory and it is guidance only. The sovereign State law if any, that
will be prevailing in decision regarding valuation procedures.
In the authors opinion, the value of HABU of land is to be arrived to its evidenced
potential value and not based on hypothetical conclusions like if the land use is changed
from one use to another, the value will be higher; in such a case evidence is essential
because to change from one land use to another, special permission is required in some
or may be all states of Indian Government.

A. MOHAMMED IBRAHIM
ARCHITECT