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Valuation: Cross-roads or Cul de Sac?

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RICS Wales Rural Conference 2014
Llandrindod Wells

Valuation: Cross-roads or Cul de Sac?
Current challenges in rural valuation work
Slides presented at the RICS Wales Rural Conference, 9 December 2014

Published in: Real Estate
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Valuation: Cross-roads or Cul de Sac?

  1. 1. Valuation: Crossroads or cul de sac? Charles Cowap RICS Wales Rural Conference Llandrindod Wells December 2014
  2. 2. Valuation is becoming …. • Broader • More Complex • More Challenging • Riskier
  3. 3. Down in the woods today …
  4. 4. Inheritance tax
  5. 5. Is Woodland: 1. A Business Asset? 2. Agricultural Property? 3. None of the above?
  6. 6. Woodland as a Business Asset • Business Property Relief – Not investment business (Balfour) • How to demonstrate Business Nature?
  7. 7. Woodland as agricultural property • Agricultural Property Relief – Nature of ‘agricultural property’ – ‘with’ and ‘ancillary’ • ‘Agricultural Value’
  8. 8. None of the Above • Woodlands Relief – Prairie Value – the custom and practice – What the IHTA 1984 (s125) says
  9. 9. An example 10 acre woodland, broadleaf, vacant possession, location accessible, upmarket and popular Various scenarios
  10. 10. Values • Freehold market value £70,000 • Agricultural value £40,000 • Prairie value £15,000 • Value of trees and underwood £20,000
  11. 11. BPR • Claim at 100% of MV • Nil IHT
  12. 12. APR • Claim at 100% of Agricultural Value (£40,000) • BPR on balance (£30,000) • Nil IHT • BPR not available? IHT on £30,000, ie £12,000
  13. 13. Woodlands Relief (1) • Value to Prairie Value • IHT due on £15,000 @ 40% = £6,000 • Further IHT on subsequent sale of timber (if ever)
  14. 14. Woodlands Relief (2) Literal interpretation • Market Value – Timber and underwood value • £70,000 - £20,000 = £50,000 • IHT on £50,000 @ 40% = £20,000
  15. 15. No claim for relief • Market Value at 40% IHT • £28,000
  16. 16. One wood Five different IHT scenarios • No relief: £28,000 • Literal Woodland Relief: £20,000 • Prairie Value Woodland Relief: £6,000 • APR but no BPR: £12,000 • Full BPR and/or APR: Nil
  17. 17. The striking impact of Amenity Value Timber and Underwood The rest: Amenity Value? Where does Prairie Value this go?
  18. 18. The moral of this story MAKE IT AND KEEP IT COMMERCIAL AND be able to prove it!
  19. 19. Other valuation challenges
  20. 20. • Market Value • Fair Value • Worth
  21. 21. The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. Fair Value The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. (IFRS 13) Investment Value Worth The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. (IVS 2013). The value of an asset to the owner or a prospective owner for individual investment or operational objectives. Market Value Bequest Value Existence Value
  22. 22. Renewable Investment Example 10 ha site for 7 wind turbines on 28 year lease, 3 years expired Turbines: 7 x 2.3 MW x 27% capacity. Output (Elec + ROC) = £83/MWh Basic Rent: £7,000 + RPI for 14 years; £12,000 + RPI thereafter Turnover Rent: 5% of gross income for 14 years; 9% thereafter Lease is taken from a larger site , rough grazing, of 100 ha in total Let to a large well established generator
  23. 23. DCF Methods ► In practice widely undertaken for larger developments ► Market Value?? ► Appraisal of worth to investor ► Would the market make same assumptions?
  24. 24. DCF: Discounting Future Cash Flows Total NPV + Worthwhile Total NPV – Not worthwhile
  25. 25. DCF Appraisal ► Remaining 25 years ► Both rents adjusted for 3.5% inflation pa ► Opening Valuation from Investment valuation ► PV of £1 at 15% gives NPV of -£172,000 ► IRR is 14% including Inflation, ie 10.5% net of inflation
  26. 26. In view of the DCF Valuation we have just looked at, does the previous investment valuation of £1.6 million for the freehold interest look: Question 1) Too high 2) About right 3) Too low
  27. 27. BACK TO BASICS • Purpose of Valuation • Scope of investigations to be undertaken • Assumptions and Special Assumptions • Preliminary Information • Capacity and assumed duration • After uses, continuation, redevelopment • Reporting Requirements
  28. 28. Reporting ► Rationale for chosen method(s) ► Detailed consideration of instructions, assumptions, sources and reliability, extent of independent verification ► Sensitivity ► Commentary on Risk?
  29. 29. Risk ► Operator/Covenant Risk ► Market Risk ► Technology Risk Shropshire Star and Daily Mail
  30. 30. Some Common Issues ► Operator Risk ► Complex lease or agreement terms ► Performance data ► Development Proposals for new Sites ► Hope Value
  31. 31. ‘Hope’ Value ???? Time
  32. 32. Some Common Issues ► Reporting Requirements ► Detailed instructions ► Market evidence
  33. 33. Cases
  34. 34. Ham v Ham [2013] EWCA Civ 1301 • Farming partnership – Young John leaves family partnership – Mum and dad elect to buy out share • Calculation of ‘net value’? – John had introduced no capital – Land shown at book value – Book value or market value? • Market value – Need for clarity in partnership agreements
  35. 35. Freemont (Denbigh) Ltd v Knight Frank LLP [2014] EWHC 3347 (Ch) • A former asylum • A valuation for secured lending • Was Knight Frank liable when P relied on it to judge an offer on the property? • NO – Exclusively for secured lending purposes
  36. 36. Valuation is becoming …. • Broader • More Complex • More Challenging • Riskier
  37. 37. Contact Details Translating new knowledge for rural professional practice  cdcowap@gmail.com  07947 706505 Twitter: @charlescowap Blog: http://charlescowap.wordpress.com/ Slideshare: http://www.slideshare.net/cdcowap

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