The increase in marginal land values in Scotland over the past five years or so has primarily been driven by the demand for land for afforestation purposes, whether that be native woodland creation for carbon offsetting or commercial afforestation. This has particularly applied to pasture with land grades of Grade 4(1) and poorer, and hill ground, but the increase in demand for this type of land has also affected prices across the board.

The profile of the purchasers had also changed during that period with the value of land often being driven by a number of large financial institutions coming into the market, looking to make a return on the land for their investors in the longer term. This is a new trend within the land market and it can have a significant impact for some transactions.  It involves a different valuation methodology, whereby the value of land is assessed much like any other development (such as housing) and the cash flows put through a discounted cash flow to arrive at an internal rate of return. When institutions and purchasers did this it often became apparent that agricultural land and rural estates capable of woodland creation, were fundamentally undervalued because of woodland creation grants and some vague assumptions regarding the future value of carbon.

Valuation challenge

As registered valuers, Galbraith’s agents are increasingly asked how they approach natural capital within valuations due to its growing focus within the industry. It is fair to say that there is a huge amount of risk associated with valuing natural capital due to there not yet being a defined methodology for valuations of this nature.

As valuers, we widely use the comparable method of valuation which takes little regard to agricultural/financial productivity, and there is an inherent lag with comparable evidence. It is important that any valuation methodology takes account of emerging environmental and market factors, which the current valuation methodology could be said to not properly consider.

For these assets, there needs to be consideration of their future potential which can be very difficult to evaluate and is not currently catered for within the methods of valuation. As we know, government policy decisions and incentives can have an enormous impact on farming, and on the value of land and property. There is a risk of either over or undervaluing assets based on one site inspection and not taking account of future policy or potential values.

If valuing natural capital assets using this method, there is a risk that decision making may not be accurate or reflect future potential. Is it time for a new valuation method to take account of these assets?

Need for clarity

In terms of Natural Capital Opportunities beyond carbon, it is difficult to attribute any hope value in valuations, as the land market has primarily been driven by carbon, not biodiversity, flood water management or any other service. This is because, in Scotland at least, it is not a tangible thing.

Carbon, is tangible in England, as is BNG, however it is still an emerging concept here in Scotland. We await with interest more clarity and more defined policy to be brought forward by the Scottish Government.

  • Natural Capital: Galbraith’s expert advisers guide our clients in realising value in all land uses – by assessing and measuring natural assets, furthering opportunities in biodiversity net gain, and ensuring stakeholders are rewarded fully for their investment in and contribution to delivering ecosystem services and net-zero outcomes.