Rent and building value

.g I. A building has a net income of INR 3, 60,000 per annum which is expected to last for a long period. Interest on investment capital is 8% in current market. What is its market value by Rental Method?

INR 3, 60,000  = C x P (P = Rate of interest from investment & C is Capital)

                                    =C x 8/100

C      = INR 3, 60,000 x 100/8 = INR 45, 00,000/=

Market Value by Rental Method: INR 45, 00,000/

(INR Four Million and Five Hundred Thousand only).

e.g. II. A building yielding a net income of INR 1, 20,000 per annum, has an economic life (Effective life) of 5 years. Market value of site as open land is 40, 50,000/=

Present rate of interest on investment is 8% and the rate of interest for safe investment of sinking fund for redemption of capital is 5%. Cost of reproduction of the building is INR 29, 00,000/= (INR Two Million and Nine Hundred Thousand only)

Determine the market value of the property.

Years purchase for rental income receivable for 5 years with 8% interest on capital and 5% interest for investment of sinking fund, from the attached Tables (Dual Rate) = 3.832

Capitalized value of rent = 1, 20,000 x 3.832 = INR 4, 59,840/- Say “A”

Salvage value of the structure is taken at 10% of cost of reproduction, which is: 29, 00,000 x 0.10 = INR 2, 90,000/- Say “B”

Market value of site: 40, 50,000: INR 40, 50,000/- Say “C”.

Present value of INR 1 deferred till the expiry of 5 years @ 8% (From the Tables = 0.681)

Hence, present value of property at the end of economic life:

0.681 X INR (B+C): 0.681 x (2, 90,000+40, 50,000) = INR 29, 55,540/- Say “D”

Capital representing the value of the property: A+D, which is INR 4, 59,840+29, 55,540 = INR 34, 15,380/- or Say INR 34, 15,000/=

(INR Three Million and Four Hundred and Fifteen Thousand only)

 Plz find Valuation Tables (Single & Dual Rate)

The above in the Reply I is for illustration purpose and does not reflect market trends.

In the author’s opinion, the Interest on investment capital for real estate can be four to six percent in the current market.

e.g. 1 above, if security is five percent instead of eight percent, the years purchase in perpetuity is 100/5 = 20.

Annual Net Rental Income: INR 3,60,000

Value by Rental Method: 3,60,000 x 20 = INR 72,00,000/=

(INR Seven Million and Two Hundred Thousand only).  

E.g 2 above, if 4% and 3% is considered instead of Present rate of interest on investment 8% and the rate of interest for safe investment of sinking fund for redemption of capital is 5%, (8% and 5%),

Capitalized value of rent: 1,20,000 x 4.379 (From Dual rate tables) = INR 5,25,480 Say “A”

Salvage value of construction: INR 2,90,000 Say “B”

Current market value of Site (Land extent is 675 sf): INR 40,50,000 Say “C”

Hence, present value of property at the end of 5 years:

0.822 (From Single rate tables) X INR (B+C): 0.822 x (2, 90,000+40, 50,000) = INR 35,67,480/- Say “D”

 Capital representing the value of the property: A+D, which is INR 5,25,480+35,67,480 = INR 40,92,960/- or Say INR 41,00,000/=

Please note the current market value of site is about INR 40,00,000/- or per ground (2,400 sf) is between 1.25 crore to 1.5 crore in that locality in Chennai.

In valuation practice, the valuation by Rent Capitalization Technique is counter checked with valuation by Land & Building Method.