1.00 Many valuers think that valuation is a simple task of estimating land value and building value. These valuers consider valuation as technical or economic assignment. However some other valuers go little further and they consider valuation as assignment of estimation of right of a person in land and buildings. This is because they think that laws give right to a person to own and manage the property. Various laws considerably affect the value of the property in open market.
- Some of the laws which effect value of Real Estate are as under :
(i) Transfer of Property Act.
(ii) Rent Control Act.
(iii) Urban Land Ceiling Act.
(iv) Town Planning Act.
(v) Development Control Rules.
(vi) Municipal Corporation Act & Building Byelaws.
(vii) Highway Act.
(viii) Coastal Regulations Act.
(ix) Indian Electricity Act.
(x) Indian Easements Act.
3.00 Transfer of Property Act : This Act governs rights of a person in the property. There are several rights (Bundle of Rights) connected with the property. Owner of the property has right of self use of the property or to rent, mortgage, gift or destroy the property owned by him. Normally it is said that you can’t eat the cake and also keep the cake. But in case of Real Estate, you can rent the property (part with possession) yet you can own the property (Right to income). This is possible due to various provision of Transfer of Property Act.
3.10 Section 6 of T.P. Act lists out the rights which can not be transferred or sold. All other rights in whole or part can be sold in open market. It is obvious that transfer of full rights will fetch higher price in market whereas transfer of part rights will fetch less price in market.
3.20 Sometimes a covenant is created while sale or transfer of the property under T.P. Act. This restrictive covenant depreciates value of the property considerably. In one case covenant stated that no construction above 5’-0” height can be erected in the plot transferred. This covenant scared away most of the buyers in the market. Finally after 3 years lapse a person came to buy such a property. His intension was to use the land for Petrol Pump. Other covenants could be to provide garden in some part of the plot or to restrict height of building on the plot or restrict F.S.I. on the plot or to keep certain part of the land as permanent passage. These restrictive covenants reduce the value of the land in the open market.
3.30 As per Section 44 of T.P. Act, undivided share of a co-owner in jointly owned property can be sold in the market. Purchaser will acquire right for joint possession or right to enforce partition. However sale of undivided rights in dwelling house to an outsider does not give such rights to the outsider . Only right to income from such a property can be permitted to such outside purchaser of undivided share. Undivided share always fetch less price in market.
3.40 Under Section 58 of T.P. Act, owner can mortgage the property and raise loan against property owned by him. However mortgaged property depreciates in the open market as compared to unencumbered property.
3.50 Section 105 of T.P. Act permits leasing of the property. Depending upon lease conditions, value of Right of Lessor and value of Right of Lessee would change. In any case land with freehold tenure would fetch higher price in the market vis-à-vis leasehold property.
4.00 Rent Control Act : This is the worst act enacted by various states of our country. This Act killed the major economic activity i.e. building construction for letting, in most of the urban areas of our country. Building Industry ranks 2nd to the Agricultural activity which gives boost to almost all the other industries (Including Textile) of the Nation. Not only that, it creates several new job opportunities for worker class as well as middle class persons in the society. But political leaders have chosen to enact Rent Act thereby freez the rent of the premises. The effect of this act was the conversion of an Appreciating Asset (Real Estate), into a Depreciating Asset. Value of Rented properties went on depreciating as years passed by. In one case, a property was acquired for an actual price of Rs.10 lacs. It was let out for a rent of Rs.4000/month. Its value came down to Rs.3.50 lacs in an open market immediately after renting.
4.10 However an interesting provision is made in Maharashtra Rent Control Act 1999 effective from 31-3-2000. Section 56(i) of this revised Rent Act, permits taking of premium (Pugree) by the tenant for surrender of tenancy rights. Similarly section 56(ii) permits landlord to accept premium (pugree) for creation of tenancy as well as for transfer of tenancies. These provisions will have considerable effect on the value of the property in the open market. It is for a valuer to estimate these rights after study of Market Trends in the locality.
5.00 Urban Land Ceiling Act : This may be perhaps the unique act in the whole world. Any one holding excess vacant land under the act would be entitled to get maximum amount of Rs.200,000/- when the property is taken away by the Government under this Act.. This Act had severe depressing effect on values of the buildable land in all major cities of our country. Some states have now scrapped this bad act but some states have still retained it on statute book.
5.10 This act gave rise to two tier of land values for land in same locality. One rate for land held within the ceiling limit and another rate for excess vacant land. If a person ‘A’ holds only 900 sq.mts. land in ‘B’ class city, his land could be valued say at Rs.500/sq.mt. However if another person ‘B’ owns next adjoining plot having area of 500 sq.mts. in same locality, (Owner ‘B’ also owning 2nd open plot in the town ,having 1000 sq.mts. area) said land would fetch only Rs.5/sq.mt. in the market. This is because 500 sq.mts. will be treated as an excess land as per provisions of U.L.C. Act. For ‘B’ class city , 1000 S.M. is the ceiling limit and hence any extra land is treated as an excess land.
5.20 One good thing emerged out of this worst land reform act since independence. The implementation of this act in major towns , practically stopped developments in major towns. Developers therefore started developing lands in smaller towns where U.L.C. Act was not applicable. Thus all outskirt township of major cities started developing and land values in such small towns also showed increasing trend in the land values during last 25 years.
6.00 Town Planning Act : Development Plan made under this Act, prescribed permitted land use patterns in the town. These zonal users increased value of land earmarked for commercial use and materially depreciated values of land marked for Garden reservation or marked for No Development Zone.
6.10 Development Control Rules : F.S.I. Rules prescribed under D.C. Rules changes land values. Land on which higher F.S.I. say 1.33 is allowed ,it increases its market value. Where as land on which lower F.S.I. say 0.50 is permitted,instead of 1.00 FSI, it reduces its market value.
7.00 Other acts also do have its own effect on the values of the property. Depending upon restrictions provided under various act, corresponding reduction in value of the property is observed. Coastal Regulations regulates development within 500 meters distance from high tide coastal line. This regulation reduces land value in coastal areas where in fact land values would be normally higher due to sea view or sea frontage.
8.00 We make several idealistic acts but we hardly see that they are strictly implemented. Our people have also mastered the Art of making holes in enacted laws.
9.00 Our beloved President Dr. A.P.J. Abdul Kalam has said “ Dream, Dream and Dream. Convert the dreams into thoughts and thoughts into Action” Let us therefore start with the first step “Dream”.
10.00 Let us dream of a wonderful town where laws governing and regulating land developments do not affect the value of land in the open market but land values are governed by economic developments in the town rather than legal enactments.
24th September2004 28-9-2002 IOV/ Solapur
Articles on Valuation of Real Estate 