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Rural Valuation Update, Ludlow, 19 June 2015

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Slides to accompany CPD evening at Ludlow, a Valuation Update, RICS West Midlands CPD Foundation, 9 June 2015

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Rural Valuation Update, Ludlow, 19 June 2015

  1. 1. Charles Cowap MBA MRICS FAAV Valuation Update RICS West Midlands CPD Foundation Ludlow 9 June 2015
  2. 2. Charles Cowap MBA MRICS FAAV Valuation is becoming …. • Broader • More Complex • More Challenging • Riskier
  3. 3. Charles Cowap MBA MRICS FAAV Basis of Farm Stocktaking Valuations BEN 19 Business Income Manual 55410: Farming: stock valuation Help Sheet HS 232 2014 and 2015 SPOT THE DIFFERENCES!!
  4. 4. Charles Cowap MBA MRICS FAAV Guidance ……
  5. 5. Charles Cowap MBA MRICS FAAV BIM 55410 • FRS 100, 101, 102 – ‘New UK GAAP’ – Periods starting after 1.1.2015 • Fair Value (less costs to sell) choice • Biological assets – Living animals and plants • Agricultural Produce – Harvested product of a biological asset
  6. 6. Charles Cowap MBA MRICS FAAV Biological Assets • Fair value less costs to sell • Fair value at point of harvest = cost at that date • Market prices if possible • Market derived prices • Present value of expected cash flows, discounted ….. Agricultural Produce • Fair value as well • FRS 102, section 34: Fair Value model is a policy choice (against cost model) • Reporting requirements
  7. 7. Charles Cowap MBA MRICS FAAV Reporting Requirements • RICS Red Book …. • AND FRS 102 ….
  8. 8. Charles Cowap MBA MRICS FAAV Down in the woods today …
  9. 9. Charles Cowap MBA MRICS FAAV INHERITANCE TAX
  10. 10. Charles Cowap MBA MRICS FAAV Is Woodland: 1. A Business Asset? 2. Agricultural Property? 3. None of the above?
  11. 11. Charles Cowap MBA MRICS FAAV Woodland as a Business Asset • Business Property Relief – Not investment business (Balfour) • How to demonstrate Business Nature?
  12. 12. Charles Cowap MBA MRICS FAAV Woodland as agricultural property • Agricultural Property Relief – Nature of ‘agricultural property’ – ‘with’ and ‘ancillary’ • ‘Agricultural Value’
  13. 13. Charles Cowap MBA MRICS FAAV None of the Above • Woodlands Relief – Prairie Value – the custom and practice – What the IHTA 1984 (s125) says
  14. 14. Charles Cowap MBA MRICS FAAV An example 10 acre woodland, broadleaf, vacant possession, location accessible, upmarket and popular Various scenarios
  15. 15. Charles Cowap MBA MRICS FAAV Values • Freehold market value £70,000 • Agricultural value £40,000 • Prairie value £15,000 • Value of trees and underwood £20,000
  16. 16. Charles Cowap MBA MRICS FAAV BPR • Claim at 100% of MV • Nil IHT
  17. 17. Charles Cowap MBA MRICS FAAV 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
  18. 18. Charles Cowap MBA MRICS FAAV Woodlands Relief (1) • Value to Prairie Value • IHT due on £15,000 @ 40% = £6,000 • Further IHT on subsequent sale of timber (if ever)
  19. 19. Charles Cowap MBA MRICS FAAV Woodlands Relief (2) Literal interpretation • Market Value – Timber and underwood value • £70,000 - £20,000 = £50,000 • IHT on £50,000 @ 40% = £20,000
  20. 20. Charles Cowap MBA MRICS FAAV No claim for relief • Market Value at 40% IHT • £28,000
  21. 21. Charles Cowap MBA MRICS FAAV 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
  22. 22. Charles Cowap MBA MRICS FAAV The striking impact of Amenity Value Prairie Value Timber and Underwood The rest: Amenity Value? Where does this go?
  23. 23. Charles Cowap MBA MRICS FAAV The moral of this story MAKE IT AND KEEP IT COMMERCIAL AND be able to prove it!
  24. 24. Charles Cowap MBA MRICS FAAV OTHER VALUATION CHALLENGES
  25. 25. Charles Cowap MBA MRICS FAAV • Market Value • Fair Value • Worth
  26. 26. Charles Cowap MBA MRICS FAAV 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. 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) 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. Fair Value Investment Value Worth Market Value Bequest Value Existence Value
  27. 27. Charles Cowap MBA MRICS FAAV 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
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  32. 32. Charles Cowap MBA MRICS FAAV DCF Methods • In practice widely undertaken for larger developments • Market Value?? • Appraisal of worth to investor • Would the market make same assumptions?
  33. 33. Charles Cowap MBA MRICS FAAV DCF: Discounting Future Cash Flows Total NPV + Worthwhile Total NPV – Not worthwhile
  34. 34. Charles Cowap MBA MRICS FAAV 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
  35. 35. Charles Cowap MBA MRICS FAAV Question • 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: 1)Too high 2)About right 3)Too low
  36. 36. Charles Cowap MBA MRICS FAAV 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
  37. 37. Charles Cowap MBA MRICS FAAV Reporting • Rationale for chosen method(s) • Detailed consideration of instructions, assumptions, sources and reliability, extent of independent verification • Sensitivity • Commentary on Risk?
  38. 38. Charles Cowap MBA MRICS FAAV Risk • Operator/Covenant Risk • Market Risk • Technology Risk Shropshire Star and Daily Mail
  39. 39. Charles Cowap MBA MRICS FAAV Some Common Issues • Operator Risk • Complex lease or agreement terms • Performance data • Development Proposals for new Sites • Hope Value
  40. 40. Charles Cowap MBA MRICS FAAV ‘Hope’ Value ?? Time Value
  41. 41. Charles Cowap MBA MRICS FAAV Some Common Issues • Reporting Requirements • Detailed instructions • Market evidence
  42. 42. Charles Cowap MBA MRICS FAAV Bed Time Reading: the Red Book January 2014 December 2014 amendments
  43. 43. Charles Cowap MBA MRICS FAAV Valuation: a broad scheme Agree Terms of Engagement Must include: Defined Basis of Value .... Apply Valuation Methods Formal Reporting Requirements Follow up advice - publication issues Market Value Fair Value Worth Existing Use Value Other Basis?? Competence Purpose Assumptions Special Assumptions Inspection etc Sales comparison Investment approaches DRC Other? Extensive Revaluation Reinspection Appropriate publication
  44. 44. Charles Cowap MBA MRICS FAAV Example Let farm, AHA 1986 Discussion Point How do these values relate to Market Value, Fair Value and Worth? • Market Value, Fair Value and Special Assumptions Farmland Value VP £3 m Value STT £1.8 m Special Purchaser Bid: 3.5 million?
  45. 45. Charles Cowap MBA MRICS FAAV Not generally a Red Book matter, but ….. VALUATION METHODS ► Other allied guidance (Guidance Notes, Information Papers, other professional briefings)
  46. 46. Charles Cowap MBA MRICS FAAV Other Guidance ….
  47. 47. Charles Cowap MBA MRICS FAAV December 2014 Amendments
  48. 48. Charles Cowap MBA MRICS FAAV New UK VS and GN’s The 2014 Amendments
  49. 49. Charles Cowap MBA MRICS FAAV New UK VS and GN’s The 2014 Amendments
  50. 50. Charles Cowap MBA MRICS FAAV New UK VS and GN’s The 2014 Amendments
  51. 51. Charles Cowap MBA MRICS FAAV Lessons from Practice • VRS Monitoring and other issues • Conflicts of Interest – File Records • Comparable summary and analysis • Others?
  52. 52. Charles Cowap MBA MRICS FAAV CASES
  53. 53. Charles Cowap MBA MRICS FAAV 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
  54. 54. Charles Cowap MBA MRICS FAAV 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
  55. 55. Charles Cowap MBA MRICS FAAV Valuation is becoming …. • Broader • More Complex • More Challenging • Riskier
  56. 56. Charles Cowap MBA MRICS FAAV 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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