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Rural Industries Research & Development Corporation
EMS and Land Valuation:
The potential for land valuation to drive the adoption of Environmental Management Systems in Agriculture
by Catherine Nind, Department of Agriculture, Western Australia May 2002
RIRDC Publication No. 02/040 RIRDC Project No. DAW-99A
The uptake of EMS in agriculture has been slow, despite the potential benefits of using the system.
Incentives to encourage the adoption of EMS are needed to increase its implementation. Improved land valuation has been suggested as one potential incentive. The possibility of linking EMS to valuation for rating and taxation was therefore investigated. This type of valuation uses comparable market sales of land as a starting point for calculation. Consequently, the potential effect of EMS on market value was also examined.
The compilation and interpretation of existing information and opinion forms the basis of this report and its conclusions. Investigations involved desk top research into methods of valuation for rating and taxation, market value and EMS and informal discussions, a survey and workshop with valuers, realtors and the banking sector. The study focused on Western Australian issues, but the findings are considered applicable Australia wide.
The study found that valuers are only able to take into account a particular attribute of a property when valuing land if it is reflected in the value set by the market place. Environmental considerations are generally only taken into account when there is a benefit or detriment to the market value of land, as evidenced by comparable market sales. Therefore, until EMS is considered to have value in the property market, it is unlikely to be reflected in the market value of land determined by a real estate valuer.
It was found that it is the after effect of having an EMS, such as improvements in productivity of the land and the condition of natural resources that will increase land values in the market place. Land values for properties with EMS are likely to be in the upper end of a range of values set using comparable market sales. Properties that have sound environmental management practices in place are likely to achieve the same result without having a formal management system in place. Realtors could assist in increasing awareness of EMS in the property market by including information on the system in advertisements for rural properties.
Investigations of the possible incentives linked to valuation for rating and taxation included: • the provision of a formula discount, or concessional valuation on the value of a property with EMS; and • a reduction in rates through a rate rebate, differential rating or grant.
EMS is a process based standard rather than a performance based standard. This means that the environmental performance of a business with EMS varies according to the commitment of the business to managing the environmental impacts of its activities. The development of performance standards for use in an EMS would ensure that real improvements in environmental performance are gained from implementing the system and from the provision of incentives.
Discussions with Valuer General Offices’(VGO) throughout Australia showed that they are reluctant to offer a formula discount for properties with an EMS because of administrative difficulties and because valuation is not a tool that has been designed to take into account management on individual properties. Valuers already apply formula adjustments to valuation to determine unimproved value (where this method is used) and notional value of farm land near the urban fringe in some States.
Therefore, providing a formula discount on valuation through VGOs remains a possibility. Further investigation is warranted when EMS becomes more prevalent in agriculture and performance standards have been progressed. It is suggested that any incentives linked to valuation should be offered through local government via the rating system.
Local shires are often limited in their ability to offer incentives because of a lack of flexibility in legislation, a limited budget and the lack of people to implement these schemes. Rates also form a small part of the cost structure of a farm and therefore provide a limited incentive to adopt more environmentally sound practices. Incentives linked to rating are more likely to be successful in shires that have a large and more diverse rate base, particularly if the shire is on the urban fringe and has a significant urban population. Rate rebate schemes linked to environmental management criteria have been successful in Victoria and Queensland in shires near the urban fringe. Land values have increased in some areas as a result.
A star rating system is proposed that would offer rate rebates or differential rates linked to a tiered industry approach to EMS. Star rating systems are well recognised and understood by the community and hence more likely to be accepted and adopted. Using such a system would provide the opportunity to adopt environmentally sound management practices in a step wise manner with progressive economic benefits for the user, as well as environmental benefits for all.
It is concluded that there would be a perverse outcome from linking EMS with land valuation.
Although the market value of land may increase because of improved environmental management under an EMS, this will also increase the valuation for rating and taxation. The extent of any increase in rates would be determined by the cent in the dollar rate set by councils.
The value of implementing EMS on a rural property is in providing information to stakeholders, which in turn assists in raising awareness of EMS in the market place and may then be reflected in the market value of land. Documented proof that environmentally responsible practices are in place will be needed to receive any incentives linked to land valuation. This information can also be used to demonstrate to consumers and markets that a business is managing the environmental impacts of its activities. It is the other benefits of having an EMS, such as maintained market access, reduced credit risk and improved profits that are likely to drive the adoption of EMS in agriculture. If consumers perceive that EMS has value, then this will be reflected in valuation.
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