18 Methods of Valuation · 18.1 Methods of valuation
18.1.1 Methods of valuation: classification and choosing a method
All methods of valuation fall into three approaches — market (comparison), income (capitalisation) and cost — plus development/residual methods for land with potential; the valuer picks the one for which reliable evidence exists and which matches how the property is normally bought, let or used.
- MPSC ATP
- Standard level
- 7 min read
- Free
Core facts
- Three approaches (international usage):
- Market / comparison: value from sale instances of similar properties.
- Income / capitalisation: value = net income × YP.
- Cost: value = land + depreciated cost of the building.
- Methods usually listed in Indian texts:
- Rental (investment) method
- Direct comparison with capital value (sales method)
- Profits method
- Cost method — contractor's / land and building method
- Development method (hypothetical layout / building; residual)
- Depreciation method (for the building part)
- Land-only techniques: belting, frontage and corner adjustments.
- Income capitalisation branches (ATP 2025): rental method, profits method and rateable value method.
- Typical match (ATP-style):
| Property | Method |
|---|---|
| Let-out office / flats | Rental (investment) |
| Hotel, cinema, petrol pump | Profits |
| Temple, school, public library | Contractor's (cost) |
| Land ripe for development | Development / residual |
| Plots in an active market | Comparison |
Explained
Classification of property for valuation (ATP 2025)
- Investment property — let to tenants for income (shops, offices, flats on rent). Income approach.
- Marketable non-investment property — bought and sold, but usually owner-occupied (houses, flats). Comparison approach, cross-checked by cost.
- Non-marketable, non-investment property — seldom sold or let (temples, hospitals, schools, government buildings). Cost (contractor's) approach.
- A petrol pump can fall into any class depending on tenure and use (ATP 2025 key: all three).
How to choose — ask four questions:
- Are there genuine sale instances of similar properties nearby, close in time? → comparison (best where the market is active and data good, ATP 2013).
- Does it earn rent? → rental method.
- Does its value depend on a business carried on in it, often with a licence or monopoly? → profits method.
- Is it never sold or let? → cost (contractor's) method (ATP 2013, 2023).
- Can it be developed to a higher use? → development / residual method.
Approach summary
| Approach | Basis | Key input |
|---|---|---|
| Market | What buyers pay | Comparable sales, adjusted |
| Income | What it earns | Net income, rate (YP) |
| Cost | What it costs to replace | Land value, replacement cost, depreciation |
| Residual | What it can become | GDV − costs − profit |
Purpose also matters
- Stamp duty: the Annual Statement of Rates (ASR) gives the minimum market value (see VAL-AS-01 to AS-06).
- Acquisition compensation: RFCTLARR s.26 — sale-deed average, ASR and consent-award rates (see VAL-CM-01).
- Property tax: rateable (annual letting) value or capital value (VAL-VM-02).
- Insurance: reinstatement cost of the building only; land is not insured.
- Mortgage: conservative value, as a forced sale may follow.
Common traps
- ✗ "A temple is valued by the rental method." ✓ Temples, schools and public buildings use the contractor's (cost) method (ATP 2023).
- ✗ "Hotels and cinemas are valued by comparison." ✓ Trading properties use the profits method.
- ✗ "Cost of construction is an element of comparison in the sales method." ✓ Cost belongs to the cost approach; comparison adjusts for time, location, size, shape and tenure.
- ✗ "The branches of income capitalisation are rental, comparison and cost." ✓ They are rental, profits and rateable value methods (ATP 2025).
- ✗ "Cost and value are always equal." ✓ Value can be above or below cost; land value comes from the market, not cost.
Quick revision
- Three approaches: market, income, cost (+ residual).
- Let property → rental; trading property → profits.
- Public/religious buildings → contractor's method.
- Development land → development/residual.
- Active market with good data → comparison.
- Income branches: rental, profits, rateable value.
- Property classes: investment, marketable non-investment, non-marketable non-investment.
- DCF = PV of future returns; leverage = trading on equity.
- Highest and best use guides the choice.
Go deeper: Deeper, Mains writing (beyond what MPSC ATP usually asks)
Deeper Advanced
- Highest and best use. Value is judged at the use that is legally permitted, physically possible, financially feasible and most productive. A bungalow on land zoned for high FSI may be worth more as a development site (residual method) than as a house.
- Cross-checks. A valuer should test one method with another: a comparison value against the residual value; a rental value against the cost of the building.
- Investment-analysis concepts (ATP 2018 matching):
- Discounted cash flow (DCF) — present value of future returns.
- Residual capitalisation — value of one component (land or building) is known; the other is found as the residue.
- Overall capitalisation rate — covers both return on and recapture of capital.
- Leverage — "trading on equity", using borrowed funds.
- Market value vs investment value (ATP 2013): market value is impersonal, typically unlevered and before tax; investment value is personal to a buyer, may be levered and after tax. Both are prospective (forward-looking).
- Limits of each approach.
- Comparison fails where sales are few or not genuine.
- Income needs reliable rent and yield evidence.
- Cost ignores demand: cost is not value.
- Residual is very sensitive to small changes in price or cost.
Mains writing Mains writing
- Frame: method follows evidence and market behaviour; no single method is universally right.
- Points:
- classify the property (investment, marketable non-investment, non-marketable)
- check data availability; prefer direct market evidence
- use a second method as a check; reconcile differences
- state the purpose and the date of valuation
- Way forward: better transaction databases (registration data, ASR) make comparison more reliable; standardised valuation standards improve consistency.
- Example: a municipal school — no sales or rents, so contractor's method; a hotel — profits method checked against comparable hotel sales.
Practise this topic. Questions on Methods of Valuation, with answers explained.
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