1. Charles Cowap
MBA MRICS FAAV
Valuation Update
RICS West Midlands CPD Foundation
Ludlow
9 June 2015
2. Charles Cowap
MBA MRICS FAAV
Valuation is becoming ….
• Broader
• More Complex
• More Challenging
• Riskier
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!!
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. 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
10. Charles Cowap
MBA MRICS FAAV
Is Woodland:
1. A Business Asset?
2. Agricultural Property?
3. None of the above?
11. Charles Cowap
MBA MRICS FAAV
Woodland as a Business Asset
• Business Property Relief
– Not investment business
(Balfour)
• How to demonstrate
Business Nature?
12. Charles Cowap
MBA MRICS FAAV
Woodland as agricultural property
• Agricultural Property
Relief
– Nature of ‘agricultural
property’
– ‘with’ and ‘ancillary’
• ‘Agricultural Value’
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. Charles Cowap
MBA MRICS FAAV
An example
10 acre woodland,
broadleaf, vacant
possession, location
accessible, upmarket
and popular
Various scenarios
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
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. 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. 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
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. 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. Charles Cowap
MBA MRICS FAAV
The moral of this story
MAKE IT AND
KEEP IT
COMMERCIAL
AND be able to
prove it!
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. 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
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. Charles Cowap
MBA MRICS FAAV
DCF: Discounting Future Cash Flows
Total NPV +
Worthwhile
Total NPV –
Not
worthwhile
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. 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. 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. 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. Charles Cowap
MBA MRICS FAAV
Risk
• Operator/Covenant
Risk
• Market Risk
• Technology Risk
Shropshire Star and Daily Mail
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
41. Charles Cowap
MBA MRICS FAAV
Some Common Issues
• Reporting
Requirements
• Detailed
instructions
• Market evidence
42. Charles Cowap
MBA MRICS FAAV
Bed Time Reading: the
Red Book
January 2014
December 2014
amendments
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. 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. Charles Cowap
MBA MRICS FAAV
Not generally a Red Book matter, but …..
VALUATION METHODS
► Other allied guidance (Guidance Notes, Information Papers, other professional
briefings)
51. Charles Cowap
MBA MRICS FAAV
Lessons from Practice
• VRS Monitoring and other issues
• Conflicts of Interest
– File Records
• Comparable summary and analysis
• Others?
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. 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. Charles Cowap
MBA MRICS FAAV
Valuation is becoming ….
• Broader
• More Complex
• More Challenging
• Riskier
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