Market Value of a Building

Method Of Valuation

The factors which affect the land value also affect the value of a building, but with different weightages for the factors. Investment in a building is for immediate use or return. The building, its environment and facilities available in the neighbourhood and the nearby localities affect the value of the building. Market value of a building depends on the actual performance of the building as against those required by the prospective buyer group. Determining the value of a built-up property by the ‘Land and Building Method’ (as the sum of the market value of land derived from sale instances of vacant sites and the reproduction cost of the building less depreciation), may or may not reflect the true market value. It depends on the stage of development in a neighbourhood and the condition of the building. Replacement cost is the value in a stable market but not when there is a mismatch between demand and supply.

As the land rates increase in a locality, plinth area rate of new buildings also increases as these are constructed with superior specifications to maximise the return. The market value of an old building is derived from the replacement cost with current specifications, instead of reproduction cost of the existing older specifications. In the extreme case, the older specifications may correspond to the equivalent of the new lower class. Such a building is a severe encumbrance on the land in a high income group locality. Value of the building is then derived from the plinth area rate of appropriate lower type. It is then further reduced due to the mismatch between the class of the neighbourhood and the class of the building.

Costs of building components are analysed to identify those features which are most expensive and the items of work which contribute greatly to value. Each building component can be constructed with any of the alternative set of materials, such as, brick walls or stone walls. To compare and decide the minimum cost of at which a function can be performed, the cost of each building component (such as walls, roof or finish) is considered separately.