Why Value Your Land?
Almost every piece of land needs to be valued at fairly regular intervals and for a variety of reasons, not only at times of sale. Given so many valuations take place in the marketplace, surprisingly little is known about the process and how important it is to deploy the correct professional approach. Jonathan Perks of Carter Jonas takes a look at the many circumstances that call for a property to be formally valued and explains the professional code of practice that sets the industry standard.
A core part of any land agent’s professional work is the provision of property valuation services. Valuations are required for a great number of uses, but the main ones are:
- Inheritance Tax, upon death
- Capital Gains Tax, upon sale, gift or re-organisation
All of these valuations, except where the property is to be sold, must be prepared by a qualified member of the Royal Institution of Chartered Surveyors and according to its ‘Red Book’ standard. These Red Book valuations follow a recognised, approved procedure and cover a large number of issues, such as the planning history and land use. Thus, valuations of even small parcels of agricultural land must be reasonably weighty documents.
The only valuation to be exempt from this process is when an agent is supplying a marketing report for the proposed sale of a property, where a suggested marketing figure is given. In these cases it must be made clear that the figure is for marketing purposes and is not a formal valuation.
The Valuation Process
Finding a valuer
A valuation instruction will often come from a third party, such as a lending institution for mortgage purposes. In any event, the valuer must confirm that they have the necessary experience, declare any connection to the parties to the valuation and provide proof of Professional Indemnity Insurance cover. Whilst a connection to one of the valuation parties does not necessarily disqualify the valuer from undertaking the valuation, the connection must be disclosed.
Having received instructions, the valuer must then make a full inspection of the site, and make a full photographic schedule. If any area is unavailable for inspection, then this must be made clear on the report. Whilst most valuations will not include a full structural survey or contamination report, a valuer is expected to note any obvious signs of problems that would require further inspection from a qualified specialist.
The valuation report should give a detailed description of the site, its surroundings, access, occupation and use. It should also include a full planning history and any planning potential. The availability of planning documentation on the internet has made this part of the process considerably easier, but on complex valuations, there is still no substitute for requesting planning documentation from the planning authorities.
The vast majority of valuations are based on comparable evidence of recent sales transactions. The valuer must research recent sales to find evidence of similar properties and place a value on the property through consideration of these sales. However, it is rare within the agricultural market to find direct comparables, due to the varied nature of the work undertaken, and so a valuer must use their knowledge and expertise to apportion values. As much as possible comparables should be up to date, refer to properties similar to the subject property and be geographically near. The valuer must include a commentary of the comparables to illustrate what discount, uplift or part value has been considered for the valuation figure. The ‘Market Value’ that is produced at the end of this process must be the valuer’s opinion of what the property would sell for on the open market if it were sold at the date of valuation.
Other valuations may be based on a ‘going concern’ basis, this being used where a site is being purchased subject to an existing business. In this case the value is based on the productive capacity of the site. On rare occasions, the valuer would use the direct replacement cost method, this being the cost of replacing the building. This is very much a specialist field, that applies to utility buildings which would not be sold on the open market or produce an economic return, such as abattoirs or lighthouses.
One essential part of the valuation, particularly in today’s economic climate, is a market commentary. Our valuation figures are by their very nature based on historic evidence, and therefore cannot predict tomorrow’s value. We can describe the market climate and make an informed opinion about the possibility of prices rising or falling. Valuing a mixed holding in the current market can be particularly difficult where agricultural values are strengthening dramatically, whilst residential and commercial values are weakening after several years of year on year increase.