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

1. Valuation:
Crossroads or cul de
sac?
Charles Cowap
RICS Wales Rural Conference
Llandrindod Wells
December 2014

2. Valuation is becoming ….
• Broader
• More Complex
• More Challenging
• Riskier

3. Down in the woods today …

4. Inheritance tax

5. Is Woodland:
1. A Business Asset?
2. Agricultural Property?
3. None of the above?

6. Woodland as a Business
Asset
• Business Property Relief
– Not investment business
(Balfour)
• How to demonstrate
Business Nature?

7. Woodland as agricultural
property
• Agricultural Property
Relief
– Nature of ‘agricultural
property’
– ‘with’ and ‘ancillary’
• ‘Agricultural Value’

8. None of the Above
• Woodlands Relief
– Prairie Value – the custom
and practice
– What the IHTA 1984 (s125)
says

9. An example
10 acre woodland,
broadleaf, vacant
possession, location
accessible, upmarket
and popular
Various scenarios

10. Values
• Freehold market value £70,000
• Agricultural value £40,000
• Prairie value £15,000
• Value of trees and underwood £20,000

11. BPR
• Claim at 100% of MV
• Nil IHT

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. 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. 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. No claim for relief
• Market Value at 40% IHT
• £28,000

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. The striking impact of Amenity
Value
Timber and Underwood
The rest: Amenity Value? Where does
Prairie Value
this go?

18. The moral of this story
MAKE IT AND
KEEP IT
COMMERCIAL AND be
able to
prove it!

19. Other valuation challenges

20. • Market Value
• Fair Value
• Worth

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. 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

27. DCF Methods
► In practice widely undertaken for
larger developments
► Market Value??
► Appraisal of worth to investor
► Would the market make same
assumptions?

28. DCF: Discounting Future Cash
Flows
Total NPV
+
Worthwhile
Total NPV
–
Not
worthwhile

29. 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

30. 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

31. 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

32. Reporting
► Rationale for chosen method(s)
► Detailed consideration of instructions, assumptions, sources and reliability,
extent of independent verification
► Sensitivity
► Commentary on Risk?

33. Risk
► Operator/Covenant Risk
► Market Risk
► Technology Risk
Shropshire Star and Daily Mail

34. Some Common Issues
► Operator Risk
► Complex lease or agreement
terms
► Performance data
► Development Proposals for new
Sites
► Hope Value

35. ‘Hope’ Value
????
Time

36. Some Common Issues
► Reporting Requirements
► Detailed instructions
► Market evidence

37. Cases

38. 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

39. 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

40. Valuation is becoming ….
• Broader
• More Complex
• More Challenging
• Riskier

41. 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