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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!
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
The Red Book
• RICS Valuation Standards
• Suite of:– Practice Statements– Guidance Notes– Information Papers
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Why?
• 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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
How?
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
How?
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
METHODS
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Tree valuation is big newsBig figures are touted to end the chain saw massacre
Charles CowapMBA MRICS FAAV
1. CAVATCapital Asset Value for Amenity Trees
Chris Neilan
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
CAVAT
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
10
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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%
2
Functionality based on crown size and condition of 100%
1
Amenity and appropriateness based onTownscape and visual importance + 10%Local Designation + 10%Veteran status + 30% (but total limit of +40%)
1.4
Safe useful life expectancy of 20 to 40 years: 80% .8
Total Tree Value £750,000
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Charles CowapMBA MRICS FAAV
2. Amenity Valuation of Trees & Woodlands
DR Helliwell
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
13
Charles CowapMBA MRICS FAAV
3. Guide for Plant Appraisal
CTLA
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
CTLA is not a method, but a bodyPublishing guidance on both Replacement Cost Methods…
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
…and Cost of Cure methodsValue may be optimised without full replacement (cf Macklin)
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SpeciesX
ConditionX Location
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
CTLA
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
1.0
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%)
0.4
Value £75,000
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Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
One Tree
• 3 Values?
• £38,400
• £75,000
• £750,000
20
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
• 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
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Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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?
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
APPLICATION?
• Assessment of Worth (investment value)• Compensation claims
– Damages– Compensation on compulsory purchase
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Scope
• Landlord’s Interest• Owner-operator’s interest• Separately identified asset• As part of a larger asset, eg
rural estate or farm
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Adapting Valuation Principles and Methods
• Direct Comparison and the problems of unique differences
• Some use for wind turbines?
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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?
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Layered Rents
Term
Laye
red
Ren
t
What happens here?
Reversion
Different Risk Rates?
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Profits Method
• Identify a separate rental income stream for separate capitalisation?
• Arms’ length?
• Veracity of estimated or stated profits
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Depreciated Replacement Cost
• Extreme caution!!
• Depreciation rates?
• Relationship to market or other basis of value?
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Residual Method
• All the previous problems …
• Plus Developer’s Profit
• Uncertainties over planning, grid connections etc
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
DCF Methods
• In practice widely undertaken for larger developments
• Market Value??
• Appraisal of worth to investor
• Would the market make same assumptions?
Charles CowapMBA MRICS FAAVCharles CowapMBA 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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
REPORTING
• Rationale for chosen method(s)• Detailed consideration of instructions,
assumptions, sources and reliability, extent of independent verification
• Sensitivity• Commentary on Risk?
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Some Common Issues
• Development Proposals for new Sites
• Hope Value
• Operator Risk
• Complex lease or agreement terms
• Performance data
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Some Common Issues
• Reporting Requirements
• Detailed instructions
• Market evidence
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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%
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
WIDER VALUATION ISSUES .....
• Worth and Value in Use v Market Value and Value in Exchange v Fair Value
• Valuation and other appraisal methods
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Find out more …..
www.rics.org
Rural e-news
Farmland Market, Autumn 2011 edn.
Estates Gazette18 August 2012
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
New land management Requirements are emerging
New markets
New challenges to professional practice
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Peat’s Story
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Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Context: Exmoor example
Exmoor
R Barle
R Exe
Wimbleball Resr & R Haddeo
ExebridgePumping Station
Replenishment PumpingApprox 5 miles, lifting water from 120 to 240 m AODCO 2
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
2. Woodfuel and Woodburning Stoves
3. UK ecosystem knowledge economy
4. Layered PES– Different Environmental Services
to different buyers– Eg
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
6. Carbon sequestration
7. Sustainability certification– Opportunities for
intermediaries
8. Sustainable tourism
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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]
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NEW VALUATION REQUIREMENTS ARE EMERGING
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Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
SOME WORK HAS BEEN DONE ALREADY
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Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
ECONOMIC APPRAISALWe face challenges to valuation
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Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
ECOSYSTEM SERVICESAnd Now
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Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
ECOSYSTEM SERVICES
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APPROACHES FOR THE ESTIMATION OF NATURE’S VALUES
From TEEB Foundations, Chapter 5
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
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WHERE DOES IT FIT?Valuation
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
Foresight Land Use Futures 2010
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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?
Charles CowapMBA MRICS FAAVCharles CowapMBA MRICS FAAV
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
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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
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Keeping up with latest RICS Developments
Renewables Valuations
Farm Business
Tenancies
Community Infrastructure
Levy
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Web Classes
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Questions?
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Contact Details
Translating new knowledge for rural professional practice
07947 706505
Twitter: @charlescowap
Blog: http://charlescowap.wordpress.com/
Slideshare: http://www.slideshare.net/cdcowap