Valuation:Crossroads or cul de sac?
Charles Cowap
RICS Wales Rural Conference Llandrindod Wells
December 2014
Valuation is becoming ….
• Broader
• More Complex
• More Challenging
• Riskier
Down in the woods today …
Inheritance tax
Is Woodland:
1. A Business Asset?
2. Agricultural Property?
3. None of the above?
Woodland as a Business Asset
• Business Property Relief– Not investment business
(Balfour)
• How to demonstrate Business Nature?
Woodland as agricultural property
• Agricultural Property Relief– Nature of ‘agricultural
property’– ‘with’ and ‘ancillary’
• ‘Agricultural Value’
None of the Above
• Woodlands Relief– Prairie Value – the custom
and practice
– What the IHTA 1984 (s125) says
An example10 acre woodland, broadleaf, vacant possession, location accessible, upmarket and popular
Various scenarios
Values
• Freehold market value £70,000
• Agricultural value £40,000
• Prairie value £15,000
• Value of trees and underwood £20,000
BPR
• Claim at 100% of MV
• Nil IHT
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
Woodlands Relief (1)
• Value to Prairie Value
• IHT due on £15,000 @ 40% = £6,000
• Further IHT on subsequent sale of timber (if ever)
Woodlands Relief (2)Literal interpretation
• Market Value – Timber and underwood value
• £70,000 - £20,000 = £50,000
• IHT on £50,000 @ 40% = £20,000
No claim for relief
• Market Value at 40% IHT
• £28,000
One woodFive 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
The striking impact of Amenity Value
Prairie Value
Timber and Underwood
The rest: Amenity Value? Where does this go?
The moral of this story
MAKE IT AND KEEP IT
COMMERCIAL AND be able to
prove it!
Other valuation challenges
• Market Value
• Fair Value
• Worth
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
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
DCF Methods
► In practice widely undertaken for larger developments
► Market Value??
► Appraisal of worth to investor
► Would the market make same assumptions?
DCF: Discounting Future Cash Flows
Total NPV +
WorthwhileTotal NPV
–Not
worthwhile
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
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
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
Reporting
► Rationale for chosen method(s)► Detailed consideration of instructions, assumptions, sources and reliability,
extent of independent verification► Sensitivity► Commentary on Risk?
Risk
► Operator/Covenant Risk► Market Risk► Technology Risk
Shropshire Star and Daily Mail
Some Common Issues
► Operator Risk
► Complex lease or agreement terms
► Performance data
► Development Proposals for new Sites
► Hope Value
‘Hope’ Value
????
Time
Some Common Issues
► Reporting Requirements
► Detailed instructions
► Market evidence
Cases
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
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
Valuation is becoming ….
• Broader
• More Complex
• More Challenging
• Riskier
Contact DetailsTranslating new knowledge for rural professional
practice
[email protected] 07947 706505Twitter: @charlescowapBlog: http://charlescowap.wordpress.com/Slideshare: http://www.slideshare.net/cdcowap
