Valuation: Cross-roads or cul-de-sac?

This was the title of my presentation at the RICS Wales Rural Conference held on Tuesday 9 December 2014 in Llandrindod Wells.  Here are the slides.

The contrast between the complexities of valuing woodland for taxation purposes and renewable energy installations is meant to indicate the broad sweep of the challenge facing the modern rural valuer. This is a challenge which is likely to be become broader and more complex with the need to consider the valuation of natural services and capital. Equally the accountability of valuers is only set to grow as the two case updates demonstrate.

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Woodland Complexities

The latest Rural Briefing from RICS addresses the challenging area of woodland taxation and valuation.  A lot can go wrong as the examples we presented at yesterday’s South East Rural Update Conference demonstrated.  One wood worth £70,000 but potentially five different Inheritance Tax bills ranging from nil to £28,000.  Capital Gains Tax was little better with potential bills on disposal ranging from less than £5,000 to more than £11,000.

A link to the briefing paper and an introduction to it can be found here.

These slides summarise the paper.  David Lewis and I presented them at the RICS South East Rural Update on 24 February 2014.

Two further observations emerged during the conference discussion. Ensuring that woodlands can be recognised as a business asset may help to tip the balance in a ‘Balfour’ appraisal of a rural estate, helping to ensure that the majority of estate activity can be recognised for Business Property Relief from Inheritance Tax. This would not only save potentially high IHT bills on woodland assets themselves, but also on other estate assets which might otherwise be unrelievable. Another follow-up question concerned the production of biomass for ‘own use’. This could indeed be a grey area, but one approach may be to ensure that the value of the timber sales is clearly accounted for in estate and woodland records.

 

Spending Review 2013: Looking for agriculture, environment or rural? Don’t bother

Chancellor Osborne today set out his Spending Round for 2015-16.  Widely mislabelled as a Comprehensive Spending Review, the review only relates to one year – the year in which the next General Election will take place.  It doesn’t offer much hope for the countryside, but there could be some interesting implications for rural property and land in general.

The headlines include:

  • Osborne had to achieve £11.5 Bn overall in cuts
  • The overall emphasis is on growth and public service reforms, with an emphasis on localism, efficiency and fairness
  • A big requirement is to keep mortgage rates low – probably good news for property and housing markets (and a wider-scale disaster if they are allowed to rise)
  • £50 Bn capital spending infrastructure in 2015, covering roads, railways, broadband and flood defences (but see more below).  More on this will follow on Thursday, but likely candidates include improvements to the A14, HS2 and the Mersey Gateway Bridge
  • Schools and tax inspectors will benefit from increased funding
  • Ed Balls for Labour says we should be spending £10 Bn on infrastructure now, while the Institute for Fiscal Studies says we are stuck with austerity until 2018

Important points for the countryside include:

  • Defra subject to further cuts of £37 million by 2013, with its overall budget going down from £2.2 Bn in 2011-12, to 1.9 Bn in 2013-14, £1.7 Bn in 2014-15 and £1.6 Bn in 2015-16 (a year on year cut of 9.6% from 2014 to 2016)
  • Defra has recently been likened to a fourth emergency service for its role in flooding, animal and plant disease (think Foot and Mouth Disease and Ash Dieback), food scandals (how we miss those horseburgers) and Bovine TB.  Flood defence spending is to be maintained in CASH terms, but of course the REAL terms story will be different
  • Defra’s settlement includes £40 million for South West Water in 2015-16 to defray south western water users’ bills
  • Meanwhile Defra has to achieve £54 million in efficiency savings in 2015-16.  This will be achieved by reduced EU fines for non-compliance and greater efficiency in its Arms Length Bodies (Rural Payments Agency, Environment Agency, Natural England) for example by sharing back office functions
  • Meanwhile Defra is to prioritise spending on ‘economically high value areas’ (geographic? Subject?).  This could be one to watch
  • Energy and Climate Change comes with a new emphasis on renewables and a commitment of £430 million for Renewable Heat Incentive, proposed new tariffs and a higher budget cap for RHI payments
  • Food Standards Agency to see a cut in funding from £94 million to £86 million from 2014-15 to 2015-16
  • Funding for science is to be maintained and enhanced, £4.6 Bn in 2015-16

For property and land, big news will come on Thursday with the announcement of Infrastructure Plans.  For the moment we know:

  • £100 Bn infrastructure spending planned for the next Parliament.  This is for transport, science, schools, housing, broadband and flood defences although it looks as if parts of large scale broadband investment may become a voucher scheme for small businesses
  • This should equate to £300 Bn infrastructure spending to the end of this decade
  • £9.5 Bn to be spent on the transport network in 2015-16
  • This will also cover 180 new Free Schools, 20 Studio Schools and 20 University Technical Colleges and Business Centres in all the major trading centres in China

On a smaller scale, Defra and DECC (Department of Energy and Climate Change) have both been targetted with spending £3 million each in the government’s Small Business Research Initiative in 2013-14.  This scheme runs across government and all departments are expected to make better use of it.  It should allow innovative companies to solve specific public sector needs in new innovative ways, so perhaps an opportunity or two here.

Search diligently through the key details document, HM Treasury, Spending Round 2013 for the words environment, climate, rural, agriculture and farming and you won’t find much.  Climate change comes up in terms of fairness – we are committing £969 million to supporting low carbon growth and adaptation in developing countries.  Other than that you’ll only find climate and environment in the appropriate department’s names (Defra and DECC), and you won’t find farming, agriculture or ‘rural’ at all.  Well done on rural proofing this one government!

So what should the land manager, farmer or rural business consultant take away from all this?

  • Of far greater significance for farming as a whole will be the CAP reforms, now possibly in the final inches towards an agreement today
  • With voluntary modulation looking like 15% in England, this could add up to 20% cuts in Single Payments for English farmers
  • And after Cameron’s little regarded EU Budget deal, it looks like 22% less funding for rural development as well
  • Meanwhile Thursday’s Infrastructure Announcement is the one to watch – will there be a new road, fibre-optic cable or railway coming to a field near you?  And will it be an opportunity or a threat to your business?

Farmers and Town and Country Planning

The interests of farmers and planners in each other were brought together on Friday 9 November 2012 at Harper Adams University College in Shropshire.  The conference was hosted by the National Farmers’ Union and the Royal Town Planning Institute with the aim of enhanced mutual understanding.

This ‘storify’ posting summarises the conference.

‘Planning for Farming’s Future, 9 November 2012’

I hope this brief summary will be helpful to farmers, their advisers and planners trying to understand each other’s perspective.

How to value Windfarms and other Renewables Projects

NEW RICS INFORMATION PAPER

As author of the new RICS Information Paper on Renewables Valuations I hope readers will appreciate this introduction and overview of the paper.

RICS (Royal Institution of Chartered Surveyors) has published an Information Paper on the valuation of renewable energy installations.

The paper concludes that:

“The appraisal of renewable energy generation capacity presents a challenging valuation task, to deal with a variety of site conditions against a scarcity of market evidence. Therefore, the valuer must pay particular attention to:

  • the agreement and confirmation of instructions with the client, and with regard to any other users of the valuation report
  • physical, financial and other data
  • meticulous recording and evaluation of all sources of information
  • careful selection, justification, application and adaptation of methods
  • clear analysis of data and sensitivity
  • comprehensive and clear reporting.

“It is imperative that the valuation is soundly based in every step of the process, and fully and clearly explained in the report, including any and all assumptions made. This should serve the best interests of clients, practitioners and other users of the valuation by providing the valuation advice they need while ensuring that the prevailing challenging conditions are fully appreciated. With this accomplished, the valuation should enable clients and valuers to proceed with the appropriate level of confidence.”

The new paper should be of particular interest to the financial sector, which is still coming to terms with the long-term implications for finance secured against property interests.

The earlier sections review the use, application and adaptation of traditional valuation approaches to the appraisal of renewables for Market Value purposes.

  • Direct market comparison has obvious limitations,
  • traditional investment approaches (income capitalisation) can be useful when valuing a landlord’s interest in an arm’s length transaction and in some joint ventures
  • replacement cost approaches present particular challenges
  • Discounted Cash Flow appraisal would follow industry practice for larger developments, but as the appraisal is likely to be particular to each developer the resultant Net Present Value  is more likely to be an Appraisal of Worth (to a particular investor) than an opinion of Market Value (as defined in RICS and International Valuation Standards)

Some aspects of renewables valuation present special challenges:

  • Sites for future development present particular uncertainties around timing, grid connections, planning consents and conditions, and confidence in the developer’s ability to see through and sustain the completed project
  • Intricate lease terms need care.  For example, stepped rents may depend on the actual output from the site.  Higher levels of output may be no more than predictions at the planning stage.  It has been known for some large sites never to achieve the thresholds for higher layers of rent payment, so risk/discount rates need to reflect this.
  • Joint ventures and more intricate leases will also need considerable care in interpretation.  This can start with the identification and definition of the site itself, but can go on to much more complicated aspects like the impact of ‘connectedness’ between the parties involved.
  • Reversionary aspects also need careful consideration.  If plant life, lease terms and planning consents mean an effective operating life of about 25 years what will happen to the site thereafter?  The working assumption in the profession at the moment seems to point guardedly towards an assumption of reversion to earlier uses (typically farming).  In this situation the renewables venture is effectively a depreciating asset.  To some extent this might be addressed within the valuation approach, in that the capitalisation factors (Years’ Purchase figures) used by valuers imply an equivalent rate sinking fund to replace the initial capital investment.  The broader elements of this do however need to be understand by clients and financiers.
  • Knock-on effects may reduce the value of property in the same ownership.  Some agreements leave detailed micro-siting considerations of, eg cable runs, for later consideration and these in turn may have consequential affects which need to be ascertained and evaluated.  In the run up to the publication of this paper, RICS has also warned of the risks that ‘free’ photo-voltaic installations may pose to the mortgageability of residential property (link to press release here).

But the paper also offers a timely reminder that we must not overlook the traditional covenant risks in asset valuation.  These include the possibility of technical problems and delays, and general risks of covenant default.  A good example occurred last year with the failure of Proven wind turbines.  This resulted in a Safety Order which put the brakes on all output from the affected turbines, and led to the financial failure of the company when it emerged that it would be unable to meet its warranty obligations.

The new guidelines have already been welcomed on Twitter for their importance in underpinning the government’s green deal (@parity projects 9 May: We need this to give the #greendeal extra hope: RICS Renewables Valuation paper http://www.ricsbooks.com/productInfo.asp?product_id=19206 Cost £20 @charlescowap @RICSnews).

Valuers up and down the country have had a preview of the new guidelines as they have been developed (see here for the slides which accompanied some of these briefings) and the draft paper was subject to extensive review from a steering group of valuers and other experts in this field.  In addition it was subject to public consultation in Autumn 2011 before being finally signed off by the RICS Valuation Standards Board earlier this year.  It therefore represents a considerable distillation of leading professional opinion in this emerging area of practice.

Readers wanting to know more, with an opportunity to pursue their own questions on Renewables and their impact on asset values, can also sign up for a RICS Training Web Class to be held on 30 May.  This 90 minute session will present an overview of the latest guidance, some examples and will offer participants plenty of opportunity to raise their own questions with the author and other delegates.  Details of the RICS Training session can be found here.

The Information Paper itself is available as a pdf file for downloading by RICS members from the member-only section of the RICS website, here.  Non-members can buy a copy from RICS Books, here.

Meanwhile practising valuers and other professionals in this field are welcome to consult me both informally and formally on the impact of the new guidelines, with regard to specific instructions, general aspects or specific requirements for inhouse or local training in this area, as several have done already.

Two wind turbines, some pink feeted geese and a planning delay

The High Court has just handed down its decision in Hargreaves v SoS for Communities and Local Government.  The Cornwall Light and Power Company first applied for permission for two wind turbines on Eagland Hill, Lancashire near the Morecambe Bay Ramsar Site of international wetland importance in April 2008.

The first application was refused so the company applied again in April 2009.  The second application was also refused, in December 2009.  Just within the six month time limit, the company appealed, in May 2010.  The appeal was successful, the planning inspector granting permission subject to various conditions on behalf of the Secretary of State on 25 August 2010.

Mr Hargreaves, a member of the Eagland Hill Action Group and local resident, was aggrieved by the Inspector’s decisioln so he sought judicial review in the High Court.  The High Court sat in Manchester on 12 and 13 July 2011, and has today (2 August 2011), handed down its decision.  So three years and three months after its first application, Cornwall Light and Power Company has secured its permission – subject to any further appeals and the need to comply with a number of conditions before work can actually start.

The basis of the case was that the Inspector had failed to consider properly whether Environmental Impact Assessment was required, that he had failed to undertake an Appropriate Assessment under the Habitat Regulations, that this had resulted in unfairness to the claimant (Mr Hargreaves), and therefore for these reasons the grant of planning permission was unlawful.  A detailed reading of the case report reveals that much debate centred on the exact interpretation to be accorded to the phrase, significant impact.  The points of concern were the adequacy of compensation or mitigation measures for the effect on the local populaton of Pink-Feeted Geese and the visual impact of the two turbines.  Various consultees had concluded that the mitigation measures for the geese, consisting of an alternative feeding area, would be adequate although various further details had to be resolved under the planning conditions imposed by the Inspector.

The claimant’s case was rejected by the judge on all counts, but at what cost to all the participants in both time and money?