Valuation Methodologies: Under-Construction vs. Completed Buildings
Mr. Lakshman S.
Mr. Lakshman S. is a Civil Engineering professional with 35+ years of experience, including 14 years overseas in construction, contracts, and project management. Since 2016, he has been working in property valuation and is a Registered Valuer with both IBBI and the Income Tax Department. He is currently based in Namma Bengaluru and brings deep expertise in Land & Building valuations.
In real estate, property valuation involves more than merely assigning a number—it reflects the economic potential, associated risks, and viability of the asset. Whether a building is under construction or already completed, its valuation plays a critical role in financing, taxation, investment decisions, and compliance. However, the methodology used to assess value shifts significantly depending on the stage of development. This article delves into how valuation differs between under-construction and completed buildings, highlighting the key principles, valuation methods, and challenges associated with each.
Why Valuation Methods Differ
Buildings under construction are still in a transformative state. Their final form, functionality, and market reception remain uncertain. Accordingly, any value attributed to them depends heavily on expectations, forecasts, and strategic assumptions. Completed buildings, on the other hand, are market-ready and offer measurable performance metrics—rent roll, occupancy levels, operational efficiency—which allow for more empirical valuation.
This difference in tangibility and data availability necessitates distinct approaches to appraisal, each with its own set of tools and risk considerations.
Approach to Under-Construction Property Valuation
When valuing a building still in development, one must account for dynamic variables such as construction progress, funding, permits, and future market conditions. Valuers typically adopt forward-looking methods that incorporate uncertainty and potential.
1. Cost-to-Complete Approach
This approach calculates the total anticipated cost required to bring the project to completion, including:
a. Construction Costs: This includes the cost of materials, labour, and contractor fees.
b. Design & Engineering Charges: Covers architectural, structural, and MEP design consultancy.
c. Approval & Regulatory Costs: Fees related to permits, statutory approvals, and environmental clearances.
d. Consultancy and Project Management Fees: Payments made to agencies overseeing project execution and timelines.
e. Administrative, Sales, Marketing & Brokerage Expenses: Includes promotional efforts and agent commissions.
f. Financing Costs: Interest on construction loans, processing charges, and related financial obligations.
g. Developer’s Profit Margin: The expected return on investment for the builder or developer.
This figure is then combined with the land value to estimate the overall asset value. However, this model is sensitive to inflation, contractor delays, and supply chain disruptions—factors that have become more volatile post-pandemic.
2. Residual Land Valuation (Development Approach)
This method, under the income approach, works backward from the projected sales price or rental yield of the completed property. From this future value, all estimated development costs, including contingency provisions and the developer’s profit, are subtracted. The remaining figure reflects the value of the land or current structure.
It’s particularly useful for investors or developers assessing whether a proposed project is financially worthwhile. However, its accuracy depends on realistic assumptions and market foresight.
3. Discounted Future Value
In select cases, especially large-scale developments, valuers project the income-generating capacity post-completion and discount it to its present value using a risk-adjusted discount rate. Although data-intensive and speculative, this method facilitates the evaluation of long-term financial viability.
Approach to Completed Building Valuation
With completed buildings, valuations can be grounded in existing data, making the exercise more reliable and evidence-based.
1. Income Capitalization Method
This is the gold standard for income-generating assets like commercial buildings or rental apartments.
It involves:
- Calculation of Net Operating Income (NOI), defined as revenue minus operational expenses.
- Applying a Capitalization Rate (i) based on market expectations.
This is represented as:
Value, V = NOI / i, where (1/i) is referred to as YP (Years Purchase)
This method reflects current performance and is ideal for stable, mature assets with reliable tenants.
2. Sales Comparison Method
For residential or small commercial buildings, comparing the subject property with recently transacted properties in the same locality is effective. Adjustments are made for differences in attributes such as age, amenities, size, and condition.
While straightforward, it’s only as accurate as the dataset. Market volatility or a lack of recent transactions can limit its reliability.
3. Replacement Cost Method
This method considers the cost of reconstructing the building in a similar condition and functionality from scratch, with less physical depreciation. It’s mainly used for unique or specialized properties that don’t have direct comparables, such as factories, schools, or heritage structures.
Key Considerations in Both Valuations
Despite their differences, several factors play a critical role in both under-construction and completed building valuations:
- Location: Proximity to commercial hubs, transport links, and amenities affects value significantly.
- Market Demand: Trends in buyer and tenant preferences must be factored in.
- Regulatory Status: Encumbrances, permits, and zoning regulations directly influence usability and, consequently, value.
- Economic Outlook: Macroeconomic indicators like interest rates, inflation, and employment rates can shift real estate valuations across both asset types.
Comparative Summary
Criteria | Under-construction projects | Completed projects |
Risk Level | High-Future-based assumptions | Lower – Based on current asset performance |
Data Dependence | Plans, forecasts, and construction timelines | Income records, comparables, and operating metrics |
Preferred Approach | Cost-to-complete, Residual, Discounted cash flows | Income method, Sales comparison, Replacement cost |
Market Sensitivity | Very high; subject to speculative influences | Moderate; influenced by actual market transactions |
Transparency | Lower, depends on construction reporting accuracy | Higher, supported by documentation and history |
Technology as a Valuation Enabler
The growing adoption of real estate analytics and tools is helping refine both under-construction and completed asset valuations. Technologies like drone-based site tracking, GIS mapping, and AI-powered cost estimators offer real-time updates on project progress, helping reduce estimation errors. Similarly, smart buildings equipped with IoT devices offer deep insights into energy consumption, maintenance patterns, and occupancy, improving valuation reliability for completed structures.
Conclusion: The Valuation Mindset Must Evolve with the Asset
Valuing a building requires not only technical knowledge but also contextual awareness. Under-construction properties demand a vision-oriented approach that looks at feasibility, risks, and potential. Completed properties, meanwhile, invite an audit-style assessment grounded in performance and facts.
No one method fits all situations. A skilled valuer must weigh the purpose of the valuation, the nature of the asset, and available data before selecting an appropriate methodology. As the property market becomes more dynamic, the line between these valuation categories may continue to blur, but the need for sound, transparent, and contextual valuation will remain indispensable.
Case Study
The case study considered herein by the valuer is not of a whole project but a small portion – viz., a few Flats in two residential towers located in Bengaluru, Karnataka.
The assignment involved the valuation of immovable properties belonging to a Company as part of the NCLT Order under Section. Sections 241(1), 242(4), and 244(1) of the Companies Act, to facilitate the exit of one of the company’s partners as of the stipulated valuation date (23 April 2024).
Valued immovable properties are:
Asset-1: Two – 3 BHK Flats in a completed high-rise residential tower, each flat with a covered car park, and the building was five years old.
Asset-2: One – 3 BHK Flat in an under-construction high-rise residential tower, along with two covered car parks
Area statement in terms of Undivided Share (UDS) of Land and Super Built Up Area (SBUA) for these flats is given below:
As required, relevant sections of International Valuation Standards – IVS 2022 were followed for this valuation. As per General Standard IVS 104, ‘Market Value’ Basis and ‘Current Use/Existing Use’ as Premise of Value were considered.
For the completed project, Land and Building Method, Composite Rate Method, and Rent Capitalization Methods were followed, and for the under-construction project, only the first two methods were followed.
Asset-1: Completed project
In the L&B method, Undivided Share (UDS) for the Land component and Super Built-Up Area (SUBA) for the Building component were considered for valuation. The land component of the property was valued as freehold land based on prevailing market rates. The Sale Comparison Method under the Market Approach was adopted for valuing the land component.
Building component was determined using the Depreciated Replacement Cost (DRC) method. Gross Current Replacement Cost (GCRC) of the Flat was arrived at by using market rates suitably adjusted for specifications and type of structure, and it was applied to the SBUA of the flat. In this regard, Plinth Area Rates (PAR 2023) published by CPWD for residential “Quarters” were followed. Depreciation for the age of the building and, in turn, the flat was deducted from GCRC to arrive at the value of the building component for the flat.
The sum of land value and building value obtained above is considered as overall market value of the flat.
In the Composite Rate Method, the composite rate for residential buildings was determined from market enquiries. Composite rates (land and building rate together) for residential buildings/ flats were gathered, and such rates were appropriately adjusted for various attributes of the comparable instances relative to the subject property and then applied to the SBUA of such a flat.
In the Rent Capitalization Method, valuation was conducted using rental data obtained through market inquiries, and such rentals were appropriately adjusted for various attributes of the instances vis-à-vis the subject property. After deducting property tax paid, the net annual income (NOI) for each flat was capitalized using an appropriate capitalization rate to arrive at the value of that particular flat. In this method, SBUA was considered for the purpose.
Market value obtained by the 3 methods cited above was INR 256 lakhs, INR 497 lakhs, and INR 183 lakhs, respectively. However, since the variation in these values was considerable, the valuer applied different weightages based on the reliability of data obtained for the above methods – viz., 30% for L&B Method, 50% for Composite Rate Method, and 20% for Rent Capitalization Method. Applying these weightages and considering the appropriate value for 2 covered car parks, the Fair Market Value (FMV) determined was INR 370 Lakhs.
Asset-2: Under-construction project
This project was not completed as of the valuation date, and as such, this flat was valued on a pro-rata basis according to the physical progress achieved.
While financial progress achieved was 60% based on payments made to the Developer, including an advance payment of 10%, physical progress achieved was about 50%. This progress was determined based on the documentary evidence provided by Project Consultants, supplemented by progress photos.
Market value obtained by the L&B method and the Composite rate method was INR 152 Lakhs and INR 84 Lakhs, respectively. Considering equal weightage, FMV declared was INR 118 Lakhs.
Overall Summary of FMV for Asset-1 & Asset-2
Based on the foregoing analysis, the total Fair Market Value (FMV) determined for both properties was ₹488 lakhs.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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