House valuation: all that it entails
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Depreciation depends on the ultimate life of the building, age, and maintenance, writes C.H.GOPINATHA RAO
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A house property can be valued in two ways. . One is the Land Building Method and the other is the Income capitalisation method. The Land building method is the popular amongst the two. The income capitalisation method may not give a realistic value under the normal circumstances.
In the Land building method, the value of the property is taken as the sum of the value of land and the depreciated value of the building. The depreciated value of the building is obtained by deducting the building depreciation from the reproduction cost. The reproduction cost is worked out based on a detailed estimate of the items of work, unit rate and rate analysis. Many perceive this to be elaborate and prefer the easier thumb rule. By multiplying the plinth area of the building with the plinth area rate we can easily arrive at the reproduction cost. These rates for standard building specifications are available with the Public Works Departments or with the reputed builders and practicing architects.
Depreciation is an effect caused by deterioration and obsolescence. It can be considered as the measure of deficiency compared to a new building. Depreciation depends on the ultimate life of the building, the present age, and the status of maintenance. Generally depreciation will be less in the early years and increases with the age of the building. The useful life of the building will be over after a certain period. The building can become uneconomical if the land gains higher value due to change in use or other reasons of urban development.
The life of the building is to be assessed before arriving at the depreciation value. The building has various components with different periods of life. Different types of foundations like open type, independent RCC footings with RCC columns, raft, under reamed pile, masonry which again may be in cement mortar or lime or clay, different types of roofing and joinery. The life of each component varies ranging from 10 years to 100 years. The value of the building goes down with age until the value is nil theoretically. Practically the building has value towards the old joineries, fittings, bricks tiles etc. and demolition contractors offer the value and undertake to demolish the building, remove the materials and debris and clear the site up to the ground level. This value, known as residual or scrap or salvage value, is normally taken at 10% of the reproduction cost.
Hence when depreciation is worked out, the salvage value of 10% will be taken into account.
The rate of depreciation is calculated by two alternative methods.
(1) Straight Line Method and (2) Balancing Decline or Geometric Progression Method.
The Straight Line method followed by the Valuation cell of the Income Tax department is as follows:
The salvage value is assumed at 10% of the construction cost and the balance 90% is distributed uniformly for a period of 60 years assuming the life of the RCC building to be 60 years. The depreciation works out to 90/60 = 1.5% per year.
If the building is 20 years old, the depreciation will be 20 years x 1.5 = 30%.
Balance Declining Method
The depreciation shall be calculated for each year on the new value arrived at after deducting the amount of depreciation for the previous year. The actual depreciation of building aged n years is calculated by using the formula
P = A {lcub} 100-r {rcub} n
{lcub} 100 {rcub}
A = total cost of construction of the building
r = rate of depreciation per annum
n= age of the building no of years
P = the final depreciated value of the building.
The amount of depreciation will equal to (A- P) subject to a minimum of ten percent of A.
The maximum depreciation allowed in valuation of building in the Registrar's office is 45%
As per the Tamil Nadu Buildings (Lease and Rent Control) Act, depreciation is calculated at the rates specified in Schedule II, following PWD norms as furnished below.
The rate of depreciation furnished by Public Works Department has been drafted decades back wherein the use of cement mortar for brickwork is not given and only the lime mortar and clay are given.
The type of roofing is not considered and only woodwork and masonry are considered.
The life of building is not assumed and only depreciation is given.
Types of Buildings and annual rate of depreciation
Buildings built in lime mortar in which teak has been used throughout is 1 per cent
Buildings built partly of brick in Lime mortar and partly of brick in mud and in which teak
has been used is 5 per cent
Buildings built in brick in mud and in which countrywood has been used is 2 per cent
Buildings which are of inferior to those of class 3 with brick in mud unplastered walls
and mud floors and in which cheap countrywood
has been used is 4 percent
In case of a building in which the first floor was constructed after a period of ten years following the construction of the ground floor, the depreciation for the first floor should not be considered separately. The depreciation adopted for the ground floor itself is being taken for the first floor also.
Example
A property comprising of 1600 sft of land with a two storeyed building with plinth area of 1000 sft in each floor and a staircase room in the second floor is to be valued as on April 2006. The G.F was constructed in 1986 and the first floor in 1996. The foundation is with isolated R.C.C. footings and RCC columns. Superstructure with brickwork in superstructure, plastered with cement mortar and finished with plastic emulsion/oil bound distember. Joinery in Teak wood, flooring with vitrified ceramic tiles, open well, sump and overhead tank and rainwater harvesting have been provided. The property is protected by compound wall with pavements around the building. The valuations of this building using different methods are given in the above table.
The author is former National President, Institution of Valuers.
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