VALUATION OF SHOP OR SPACE IN MALL
Opening
up of economy in nineties of last century and on account of globalisation and
intrusion of electronic media in all sphere of life, there has been rapid
change of life style particularly in urban India. This trend is not confined to
only metros but gradually style particularly in urban India. This trend is not
confined to only metros but
Mall
buildings are normally ¾ storyed modern building of high class specifications
having convenience like underground parking, lifts, escalators, air
conditioning, electronic surveillance, electronic bill boards, captive power plant,
lawns etc.. It is practically difficult to evaluate reproduction cost of all
the components which go into making a composite whole i.e. mall and apportion
this cost and add to the proportionate cost of land to arrive at value of the shop/space
in the mall. Over and above this practical difficulty, on the conceptual level
one can not equate the summation of proportional cost of all components making
the shop/space as reflection of its value, as all the ingredients which have
gone into making the shop/space have created a new commodity commanding
entirely different value which is different from the sum total of individual
value of ingredients.
If
one venture to give example to illustrate the point made above, one can cite
the example of two properties identical in all respect except that building of
one property is aesthetically better looking and functionally more efficient
and well planned though identical in other parameters like Plinth Area, Height,
number or storey, type of
construction,
specifications, period of construction etc.. Reproduction of cost the of two
buildings are exactly same and so are the cost of lands. This means value of
the two properties by ‘Land and Building Method’ would be same, though it is
obvious, the property with better designed building will fetch much higher
price than the other property. This indicates that when a building is married
to the land, it assumes altogether different identity and represents a
different value than the summation of cost of reproduction of the building and
the value of land.
The
same arguments hold good for shop/space within a mall. Value of shop/space is
not the summation of proportionate value of various components gone into making
that shop/space but something entirely different counted as a new entity. It,
therefore, follow that the appropriate method to value such property (shop or
space in a mall) is to compare with similar properties sold during recent past
in other words ‘Sales Comparison Method’ [or ‘Sale Instance Method’ as termed
sometimes. ‘Land and Building Method’ shall primarily be used to verify the
value arrived at by ‘Sale Comparison Method’ in normal circumstances value
arrived at by ‘Land and Building Method will be less than
the
value estimated by adopting ‘Sales Comparison Method’.
Some important characteristics factors to be
compared while adopting ‘Sales Comparison Method are given below:
i.) Location,
ii) surroundings,
iii) character of the locality,
iv) presence of any negative aspect like
garbage dumping ground, burial/burning ground, noise emitting or smoke spewing
factory etc.
v)
transport facilities,
vi) availability of parking space either
inside or around the mall,
vii) proximity of transport hub business
district and residential locality. Locality can further be categorized as posh,
upper-class, middle class, lower class, poor, viii) aesthetics of mall
building,
ix) availability of infrastructure facilities
like lift, escalator, ramp, stair case, captive power plant, air conditioning,
lighting, heating, ventilation, fire detection and fighting etc.
x) security,
xi) quality and rapidity of ingress and
egress system provided,
xii) overall quality and quantity of
entertainment package provided including food and beverage stalls and
restaurants,
xiii) nature of shop and its business,
xiv) compatibility of business of the shop
with the theme of the mall, if any,
xv) area, size and height of shop,
xvi) location of shop with reference to entry
and exit points as well as service area, floor, atrium and foyer of the mall,
xvii) quality of services provided by the
mall owner or manager,
xviii) period of business hours permitted.
For example, whether shops are permitted to run 24 X 7 throughout the year or
not,
xix) quality of construction and richness of specifications
adopted in building the mall,
xx) reputation of the promoter/builder of the
mall,
xxi) observance and compliance of all legal
requirements regarding building and running of the mall,
xxii) brand value of various products and
services accommodated in the mall.
Comparison
shall be made with similar class of properties. Divergent class properties
shall not be compared at all. For example a shop in highend multiplex mall
located in a posh locality can not be compared with a shop in a mall located in
a middle class locality.
Best
sale instance would be the sale of the same shop or space in the recent past
(contemporaneous to valuation
date)
and second best would be the sale of similar shop or space in the same mall
contemporaneous to the valuation date. If contemporaneous sale instance in the
same mall is not available, then next best would be to consider contemporaneous
sale instance of shop or space in similar mall in the same locality or
comparable locality. Selection
of
appropriate sale instances is one of the important functions of a Valuation
Officer and requires lot of judgment borne out of knowledge and experience.
If
first category of sale instance is considered, then the job of Valuation
Officer becomes much easier and in the case the Valuation Officer has to keep
following aspects in mind while estimating value of the property :
i)
Any improvement made after the transaction.
ii)
Any deterioration in service, condition of the shop after the transaction.
iii)
Improvement or deterioration of functioning of the Mall as a whole after the
transaction.
iv)
General increase or lowering of demand of such property leading to price
escalation or price reduction.
Needless
to mention that such sale instance should only be considered when it is genuine
and between willing seller and willing buyer without being affected by any
special consideration or circumstances.
In
case of second category of sale instances aspects mentioned in xiii), xiv), xv), xvi) need to be examined, analysed and
accordingly value assessed.
In
case of third category of sale instances all the aspects mentioned in above
need to be looked into and after due analysis value of the property is to be
assessed. In analyzing sale instances of second and third categories aspects mentioned
earlier in connection with first category sale instance need also to be kept in
view. Normally value of shop or space in mall shall not be less than value
estimated adopting. ‘Land and Building Method’. Malls are commercial entity and
require huge investment and demand entrepreneurship for their development. In
adopting ‘Land and Building Method’ for valuing shops or spaces in such malls
certain modifications in details are required to be effected though basic
concept remains the same.
Step
by step procedures to be followed in estimating value of such property by ‘Land
and Building Method’ is given below :
1. Land
1.1 Area of land : Sqm.
1.2 Details of Sale Instance : At least three
sale instances contemporaneous to
valuation
date are to be considered.
1.3 Land rate adopted after analysis of sale
instance : Rs. Per Sqm.
1.4 Land value : 1.1 X 1.3 in Rs.
2. Building
2.1 Work out plinth area :
i) Multi level car parking at basement
ii)
G.F. and other floors with reference to floor as well as plinth height.
iii)
Foyer whose height is normally higher than that of normal floor height.
iv)
Atrium
v)
Mezzanine
vi)
Service and other ancillary buildings.
2.2 Work out plinth area rate for each with the
help of latest Rate Analysis referred
to CPWD Plinth Area Rates and latest cost index of the place with reference to
CPWD Plinth Area Rates adopted.
2.3 Identify extra items and measure these items.
Work out rates for these items from Rate
Analysis with reference to CPWD/local PWD schedule of rates or based on
market rate analysis.
2.4 Identify all development works and
landscaping and ascertain rates for these items.
2.5 Work out the replacement cost of the mall as
whole including electrical components (on percentage basis or on percentage
basis given in CPWD Plinth Area Rates) as on the valuation data. In respect of
replacement cost of plants & machineries such as air handling unit,
escalators etc. help of audited balance sheet of company promoting the Mall may
be taken. From the balance sheet year and cost of procuring the plants &
machineries can be obtained and further details can be obtained from the
vouchers or invoices. Replacement cost of each of installed plants &
machineries may be worked as below:
Price index of the particular plant
or machinery on the Valuation date
Cost
of procurement X --------------------------------------------------------------------------------------------
Price
index of the particular plant or machinery on the date of purchase as
indicated in the voucher or invoice.
[Note:
Yearly wholesale price index of commodities issued by Office of Economic Advise
of Ministry of Industries Which can be downloaded from the website www.eaindustry.nic.in
2.6 Reproduction cost is equal to replacement
cost less depreciation. For depreciation reference may be made to the relevant
paras of these guidelines. Concept of equivalent spent life is also applicable
to plants, machineries, equipments. Assessed future life of plant, machinery
etc. depends on following aspects :
i)
Year of construction / manufacture,
ii)
History of routine and special maintenance including reconditioning, rebuilding
and retrofitting.
Guidelines
for Valuation of Immovable Properties 230
iii)
Effect of obsolescence,
iv)
Existing physical condition,
v)
History of use or operation such as whether past / present use was / is intense
or normal or moderate or low.
Reproduction
cost of buildings, fittings and fixtures, plants and machineries, equipments
etc. which are essential and
relevant
for the property functioning of the mall and part of the mall as a whole are to
be worked out based on replacement cost and depreciation.
2.6.1 While working out replacement cost 1% (one
percent) of the building cost may be added on account of architectural features.
2.6.2 For development of mall architect is employed
who charges percentage of total cost of the project. Normally malls are high
end product and project cost runs into crores. There is quite tough competition
among the architects for securing such project and therefore, 1.5 to 2% of the
total project cost may be added as architect’s fee depending on location, quantum
of project cost etc.
2.6.3 After adding reproduction cost of the project
and value of land married to the project on the date of valuation, 15% (fifteen
percentage) may be added as ‘Entrepreneur’s or promoter’s risk and profit’.
This means that value of shop or
space
would be a proportion of amount being 1.15 X (reproduction cost of the project
plus value of land married to the project). Let this be designated as V
2.7 In a mall there are lots of space meant for
common community use. Owner of a shop or space in the mall has to share common
facilities and services. Therefore, apportioning the cost indicated in para
2.6.3 above these aspects need to be kept in view. This is done in the
following manner:
2.7.1 Work out the total plinth area of the main
mall building excluding all service areas such as stair cases, lift wells, basement
exclusively providing for common services and car parking, corridors, passages,
foyer, atrium, escalator areas, circulation area in short total saleable area
of the mall, let this be designated as.
2.7.2 If plinth area of shop or space is as then
value of it would be : [v = Vas
____
As
in
general term without making any distinction between shops or spaces vis-à-vis
their floor wise location. Value of a shop or space in a mall is greatly affected
by its floor wise location. Highest value is commanded by shops or spaces
located on the ground floor. Slightly less value will be commanded by shops or
spaces located on 1st floor having facilities of adequate capacity and number
of lifts as well as escalators apart from staircases. If these two facilities
i.e. lift & as well escalators are not provided value of 1st floor shops or
spaces will come down drastically with reference to ground floor shops or
spaces. 2nd and 3rd floor of mall will be less attractive for shops but likely
to be used as office space, movie hall, theater conference room and possibly
restaurant. Floor wise variation of values can be objectively established by analyzing
scores of sale of shops or spaces in malls across the locality.
For
a modern mall in metropolitan cities like Chennai, Madurai, Coimbatore, Thoothukudi
and Tirunelveli if one makes a subjective assessment, the floor
wise
variation in values may be as follow :-.
Ground
floor : 0% variation, value per unit plinth are = v, salable area = A0
1st
floor : 10% variation, value per unit plinth are v1 = 0.9v, saleable area = A1
2nd
floor : 25% variation, value per unit plinth are v2 = 0.75v, saleable area = A2
3rd
floor : 35% variation, value per unit plinth area v3 = 0.65v, saleable area = A3
It
therefore, follows that V would be equal to A0v + A1 x 0.9v + A2 x 0.75v + A3 x
0.65v = ( A0 + 0.9 x A1 + 0.75 x A2 + 0.65 x A3 ) v, and As = A0 + A1 + A2 + A3
Value
per unit plinth area of shop or space in ground floor
V
i.e.
v = ---------------------------------------------- (A0 + 0.9A1 + 0.75 A2 +
0.65A3 )
A0 + 0.9A1 + 0.75 A2 + 0.65A3
may
be termed as equivalent plinth area of saleable are of the mall and designated
as Ae.
Therefore,
V
v= -----
Ae
As
a general expression Ae = A0 + n1A1 + n2A2 + n3A3
Where,
V V V
n1
= ----- , n2 = --------- and n3 = -----
V1 V2 V3
n1,
n2 & n3 for a particular locality are to be predetermined by analysing sale
instances of mall properties in that locality as mentioned earlier.
From
the above value of shop or space in a mall having plinth area of as is
estimated as under :
Ground
floor : asv
1st
floor : n1asv
2nd
floor : n2asv
3rd
floor : n3asv
It
is mentioned earlier that ‘Sale comparison Method’ in most appropriate method
in valuing this type of property provided it is fully owner occupied or vacant
and therefore, it is essential that sale instance data are collected regularly
on continuous basis and maintained properly. Valuation Officers shall
immediately start, if not already started, to prepare and maintain sale
instance registers and keep themselves abreast with present trend in this type
of property market and keep a note in the register for future reference.
Prepared
by
J.Jaya
Ruban,
Land
Valuer in Tamilnadu,