Out of their depth on the issue of water's value

WATER is an undervalued resource in land valuation and uncertainty over future supply is an under-estimated demerit.

This is the firm view of Hugh Fell and his argument could have a significant bearing on land prices in the long term.

Mr Fell, who runs the George F White group of rural estate agencies in Yorkshire and the North East, has more or less persuaded the Royal Institution of Chartered Surveyors (RICS) that assessment of water assets should be part of all valuations. This could have significant implications for banks, pension funds and anyone else with a stake in land.

His own business has set up a specialist consultancy to advise on water valuation and Mr Fell led a working party, including representatives of NFU and Environment Agency, to investigate the subject.

Its report was recently endorsed by a special conference of the RICS.

It said: "Compared to other valuable natural resources, such as oil, it is astonishing that in the modern day, water is not largely viewed as having any financial value."

After a period of consultation, the RICS valuation standards board is likely to recommend a methodology for specifically assessing water supply considerations,.

This approach takes in the possible future effects of population growth, water quality and extraction regulation, climate change and other influences on supply and demand. Mr Fell told the RICS conference: "The lack of a definitive methodology for such valuations means they are being carried out on an improvised basis, or indeed not at all.

If you start to dig around and ask what is the value of the water in your portfolio and how it impacts on the value of your property, you will get a blank look.

"Ultimately, banks have got securities on their books that aren't all that they think they are."

To illustrate his point, he proposed the following questions and answers.

Q: Two identical 500-acre blocks of free-draining light land ... one has a 25,000m3 reservoir; the other no access to water for irrigation. What is the difference in value?

A: Clearly there is a difference, since the land with the irrigation is able to grow high-quality potatoes, carrots, parsnips and even turf. Without irrigation, a moderate crop of barley would be the best possible.

The difference in annual output could be up to 1,500 per acre but the only difference between the two blocks of land is the reservoir. I would suggest it is worth as much as 1m.

Q: What is the value of a 20-acre lake in an area of high landscape value with strong tourism links?

A: This is a much more difficult exercise and brings together the two functions of water – utility and environmental.

A sensible valuation would require extensive research as to the specific nature and potential use of the resource, but its value could be anything from 50,000 to 500,000.

Q: What is the value of a borehole guaranteeing a reliable water supply to a hotel in a top tourist destination in sub-Saharan Africa?

A: In parts of Africa, water is extremely scarce and if you are catering for the top end of the tourist trade, failure to provide showers and flushing toilets may be the difference between successful trading and bankruptcy. If the only thing standing between those extremes is the water resource, its value needs to be clearly understood and identified – and may well run into millions.

Mr Fell told the Yorkshire Post: "Farmers and land owners need to step back and think quite carefully what water is available to them, to what degree they control it, and how they should be managing its value into the future."

CW 29/1/11