Rural Jigsaw: conventional and unconventional valuations of amenity trees, renewable energy and new...

transcript

Charles CowapMBA MRICS FAAV

A Rural Jigsaw: Traditional and new challenges to valuation and estate management: trees, energy and ecosystem services

Charles Cowap

Llandrindod Wells

4 December 2012

Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV

Valuation of trees for amenity and related non-timber uses

• RICS Guidance Note• Part of the Red Book suite• Guidance on the valuation of:

– Trees– Groups of trees– As part of property– As separate asset

• Scope: UK• Interest: worldwide!

The Red Book

• RICS Valuation Standards

• Suite of:– Practice Statements– Guidance Notes– Information Papers

• The need to value trees for various requirements

• Emergence of various methods

• Need for guidance on their relationship to Red Book concepts like Market Value

Valuation Basics:• Methods• Skills and knowledge• Terms of engagement• Specific information which

may be needed• Valuation Basis

– Market Value– Worth– Fair Value– Existing Use Value

The Facts• Site and legal interest• Statutory designation and

other forms of protection• Current and proposed site

uses• Health and condition, signs of

stress• Liability issues• Assumptions and special

assumptions

METHODS

Tree valuation is big newsBig figures are touted to end the chain saw massacre

1. CAVATCapital Asset Value for Amenity Trees

Chris Neilan

Capital Asset Value for Amenity Trees

• Basic value: unit value x size• Community Tree Index Value: population, use,

accessibility• Functional value• Adjusted value/amenity factors (+/-)• Full value/safe life expectancy

How CAVAT (probably) worked:Tree Diameter of 184 cm x Unit Value Factor of £13.18 £350,285

Community Tree Index Factor based on pop density of 84.4/ha and relative accessibility of 200% x 100%

Functionality based on crown size and condition of 100%

Amenity and appropriateness based onTownscape and visual importance + 10%Local Designation + 10%Veteran status + 30% (but total limit of +40%)

Safe useful life expectancy of 20 to 40 years: 80% .8

Total Tree Value £750,000

2. Amenity Valuation of Trees & Woodlands

DR Helliwell

Helliwell

Unit value per individual tree, 1.6.08 £25

Size of crown, 200 sq m: score 8 (max) 8

Safe useful life expectancy, 40 – 100 yrs, (max score 4) 3

Importance in landscape: score 4 (max) 4

Presence of other trees: some (max score 2) 2

Suitability to setting: score 4 (max) 4

Form (thick stem): score 2 (max) 2

Total tree value (compared to a maximum Helliwell value of £57,600)

£38,400

3. Guide for Plant Appraisal

CTLA is not a method, but a bodyPublishing guidance on both Replacement Cost Methods…

…and Cost of Cure methodsValue may be optimised without full replacement (cf Macklin)

Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV17

Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV18

SpeciesX

ConditionX Location

Installed cost for 184 cm diameter tree @ £12.55/sq cm (unit rate)

£333,541

Environmental adaptability: v suitable @ 100% 1.0

Growth characteristics: an average of scores for size, longevity and maintenance: 100, 50 and 70% respectively

Pest and disease susceptibility 0.9 0.96

Condition (90%) and Age / Asset Life (70%) 0.6

Location, based on site rating (100%) x frequency (65%) x dominance (65%) x placement (100%)

Value £75,000

One Tree

• 3 Values?

• £38,400

• £75,000

• £750,000

• Helliwell: Visual Amenity Valuation

• CAVAT: Management of trees as public assets rather than liabilities, value directly related to public benefits

• CTLA: Depreciated Replacement Cost: asset valuation – amenity value

COMPARISON• A standard unit is weighted (multiplied) for various factors• Nil value is possible• Negative value is impossible without further deductions• All are intrinsically capped• Scope for substantially different figures• No, or little, explicit recognition of land value itself

– See Lindsay and Lindsay• No Basis of Valuation in terms easily reconciled with Red

Book• DRC approaches

– Do the assumptions really work with trees?

APPLICATION?

• Assessment of Worth (investment value)• Compensation claims

– Damages– Compensation on compulsory purchase

FORMING A VIEW

• The need to ‘stand back’ and judge ‘reasonableness’• Bryant and Macklin (2005)

– Cost of replacement (DRC): £190,000– Diminution of freehold value: £25,000– Cost of replacement with young whips: £44,500

• With regard to:– Likely behaviour of property owner– Overall context of property market value

Renewable Energy Valuation

• RICS Information Paper• Part of the Red Book suite• Guidance on the valuation of

Renewable Energy Installations:– Wholesale– Own Use– Domestic– Electricity– Heat

• Landlord’s Interest• Owner-operator’s interest• Separately identified asset• As part of a larger asset, eg

rural estate or farm

Adapting Valuation Principles and Methods

• Direct Comparison and the problems of unique differences

• Some use for wind turbines?

Investment Method

• Assessment of Rent Levels• Reversionary Aspects• Layered Rents• Choice of All Risk Yield(s?)• Choice of capitalisation

period• A role for sensitivity analysis?

Layered Rents

What happens here?

Reversion

Different Risk Rates?

Profits Method

• Identify a separate rental income stream for separate capitalisation?

• Arms’ length?

• Veracity of estimated or stated profits

Depreciated Replacement Cost

• Extreme caution!!

• Depreciation rates?

• Relationship to market or other basis of value?

Residual Method

• All the previous problems …

• Plus Developer’s Profit

• Uncertainties over planning, grid connections etc

DCF Methods

• In practice widely undertaken for larger developments

• Market Value??

• Appraisal of worth to investor

• Would the market make same assumptions?

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

Clients Purposes Valuation Methodology (in no particular order)

Site owners

Site developers

Site occupiers

Finance providers

Statutory

Loan finance

Sale and purchase

Option agreements

Development appraisals

Asset distribution, e.g. probate, estate reorganisation, succession, divorce, administration and winding-up procedures

Taxation, e.g. inheritance tax, capital gains tax, rating

Business reorganisation

Financial statements

Compensation for compulsory purchase

Compensation to other interests, e.g. tenants, etc.

Discounted cash flow

Investment

Profits

Comparable

Residual

Depreciated replacement cost

REPORTING

• Rationale for chosen method(s)• Detailed consideration of instructions,

assumptions, sources and reliability, extent of independent verification

• Sensitivity• Commentary on Risk?

Some Common Issues

• Development Proposals for new Sites

• Hope Value

• Operator Risk

• Complex lease or agreement terms

• Performance data

Some Common Issues

• Reporting Requirements

• Detailed instructions

• Market evidence

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

See Estates Gazette 18 August 2012

BASIC RENT

Term: 11 years remaining

Rent 7,000YP for 11 yrs @ 8% 7.139 49,973

Reversion:

Rent 12,000YP for 14 yrs @ 10% 7.367PV £1 in 11 yrs @ 10% 0.351 31,030

TURNOVER RENT

Turbines 7Installed capacity 2.3Capacity Factor 0.27£/MWh 83Gross Income 3,160,617

Term: Turnover 11 yrs remaining

Rent @ 5% of turnover 158,031YP for 11 yrs @ 10% 6.495 1,026,410

Reversion

Rent @ 9% of turnover 284,456YP for 14 yrs @ 13% 6.303PV £1 in 11 yrs @ 13% 0.261 467,953

REVERSION TO FARMLAND

10 ha @ £2,000 20,000PV of £1 in 25 yrs @ 3% 0.478 9,560

£1,584,926

REMAINDER OF SITE, FH VP

90 ha @ £2,000 £180,000

GRAND TOTAL £1,764,926

SUMMARY

Base Rent

Term 49,973Reversion 31,030

81,003Turnover Rent

Term 1,026,410Reversion 467,953

1,494,363Reversion to Ag Use 9,560Total 1,584,926

3%2%5%

65%30%94%

1%100%

WIDER VALUATION ISSUES .....

• Worth and Value in Use v Market Value and Value in Exchange v Fair Value

• Valuation and other appraisal methods

Find out more …..

www.rics.org

Rural e-news

Farmland Market, Autumn 2011 edn.

Estates Gazette18 August 2012

New land management Requirements are emerging

New markets

New challenges to professional practice

Peat’s Story

Context: Exmoor example

Exmoor

R Barle

Wimbleball Resr & R Haddeo

ExebridgePumping Station

Replenishment PumpingApprox 5 miles, lifting water from 120 to 240 m AODCO 2

Top 10 Business Opportunities

1= Biodiversity Offsetting (BDO) and Conservation Banking• Estimated size of market £50 – 300 million

pa from housing, plus other sectors• Brokerage, certification and registration• Additional costs to builders/developers

deducted from land value

1= Peatland Carbon Code and Carbon Credits• Peat restoration for carbon storage• Management schemes and incentives• Certification and brokerage

2. Woodfuel and Woodburning Stoves

3. UK ecosystem knowledge economy

4. Layered PES– Different Environmental Services

to different buyers– Eg

6. Carbon sequestration

7. Sustainability certification– Opportunities for

intermediaries

8. Sustainable tourism

9= Global centre of excellence in ESS certification

9= Water re-use technology

11 Reducing insurance risk through green infrastructure

12 Environmental bonds

http://www.valuing-nature.net/opportunities-uk-business-protect-and-value-natures-services-report-published-today [accessed 19 July 2012]

NEW VALUATION REQUIREMENTS ARE EMERGING

SOME WORK HAS BEEN DONE ALREADY

ECONOMIC APPRAISALWe face challenges to valuation

ECOSYSTEM SERVICESAnd Now

ECOSYSTEM SERVICES

APPROACHES FOR THE ESTIMATION OF NATURE’S VALUES

From TEEB Foundations, Chapter 5

Market Analysis

Group Valuation

Contingent Valuation

Cost Methods

Replacement Cost

Methods

Avoided Cost

Methods

Deliberative Valuation

Regime Shift Analysis

Insurance ValueResilience

Value Risk Analysis

Ecological Footprint

Mitigation Cost

MethodInput/Output

Analysis

Joint Analysis

Production Function

WHERE DOES IT FIT?Valuation

Foresight Land Use Futures 2010

Key Questions for RICS

• Is this anything to do with us?

• Our Public Interest Function in this area?

• Our Member Services Function in this area?

• Our Global Positioning?

• What, if anything, needs to be done?

Thinkpiece

• Royal Charter– Promote the usefulness

of the profession to public advantage

• New opportunities in land management

• New ways of working in development

• New points to reflect in conventional valuations

• New types of valuation

And we should offer:

• Our expertise

• In Land Tenure and its relationship to land management and development

• Our experience of valuation in challenging commercial markets

• Our expertise in brokerage

Keeping up with latest RICS Developments

Renewables Valuations

Farm Business

Tenancies

Community Infrastructure

Web Classes

Questions?

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

Rural Jigsaw: conventional and unconventional valuations of amenity trees, renewable energy and new...

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