The current treatment of the value of forest land in cashflows created for the purpose of forest valuation in New Zealand : A dissertation submitted in partial fulfilment of the requirements for the degree of Master of Professional Studies at Lincoln University

Abstract

I believe that there is an ongoing debate amongst members of the New Zealand Institute of Forestry (NZIF) in general, and forest valuers in particular, over how to deal with the issue of calculating an implied land rental to be charged against the value of a tree crop when assessing the Net Present Market Value of that crop. The New Zealand Institute of Forestry Professional Handbook, (hereafter referred to as 'the Handbook') in the Standard for Forest Valuation Method, sets out guidelines on how the issue should be dealt with. Land Expectation Value and the Land Market Value as valuation methods may be significantly different in the New Zealand situation, as there are competing uses for rural land, such as dairy farming or forestry as examples. As such the choice of which method to use to calculate the land rental contained in a cashflow, may have a significant impact on the final outcome of the forest valuation despite of the tree crop having the same potential stumpage value at harvest. This dissertation investigates what methodologies forest valuers in New Zealand currently employ to deal with this issue and how these methodologies affect the outcome of the forest valuations produced. A postal survey of 500 active members of the New Zealand Institute of Forestry was conducted to establish what different methodologies are in current practice and how the application of these different methodologies would affect a forest valuation. The survey found that the application of this particular aspect of forest valuation is inconsistent across those members of the NZIF who are active in forest valuation. While Land Expectation Value may be a valid concept for establishing a price that could be paid for forestry land at a given interest rate, its acceptance for use in forest valuation amongst the forest valuing members of the NZIF is limited at best. All of the respondents who apply land rental calculations other than those set out in the NZIF standards do not accept, in part or total, the assumption that the land (and the cost of using land) is a relevant input to the production of a forest. Where the cost of using the land occupied by a forest is reduced to a level below that which would be achieved by the application of a discount rate to the land market value, as recommended in the NZIF standards, the valuer is in effect admitting that forestry, at that particular discount rate and land value, is not the highest and best use for that land.