Pricing Credits Is Not the Same as Valuation
Pricing and valuation are related but distinct questions in the NSW BOS Market.
In a market like the NSW Biodiversity Offset Scheme (BOS) the gap between pricing and valuation advice is likely to be wider than most participants realise.
Pricing advice addresses what a credit is likely to trade for in an arms length transaction. This is achieved by drawing on transaction history, current market depth, buyer pipeline, and the relationship between open-market prices and the government's Biodiversity Conservation Fund charge rate. It is inherently probabilistic and near term. It's what you need when you're thinking trading prices and negotiations.
Valuation addresses what an asset is worth at a defined point in time, for a specific legal or commercial purpose, using a methodology capable of withstanding scrutiny. It's what you need when the answer carries legal or financial consequences. This includes tax assessments, internal book valuations, and when considering whether a BSA is going to be a good investment on your land.
In liquid, homogeneous markets the two should be very similar. In the NSW BOS market they are often very different, for reasons that are structural rather than circumstantial.
The BOS credit market has features that make it genuinely difficult to value well.
Thousands of distinct markets exist in the scheme. A Koala species credit and a grassy woodland ecosystem credit in the Tablelands are different assets with different buyer pools, distinct pricing trends, and different realistic sale timelines. Many credit types have thin or no transaction history.
For a significant proportion of credits, the realistic sale timeline is years and some may never sell at all. This means present value can sit substantially below the nominal per-credit price.
For example, a recent project for multi-million dollar credit portfolio found that it should be valued at 13% of its nominal value. This was due to large holdings in markets with limited near term trading prospects.
In this case, a landholder should not enter into a BSA without an upfront purchase agreement as a speculative project would seriously unviable.
For a developer getting the valuation wrong risks unnecessary tax bills and numbers on the books that will never be realised.
The features of the market and this valuation example mean that applying standard approaches (drawing on a handful of comparables, applying a general discount rate, anchoring to the BCF charge or NSW Government dashboard price) without understanding the specific mechanics of each credit market will produce results that are at best imprecise and at worst very wrong
When to seek valuation advice
There are several contexts where BOS credit holders, landholders, and developers should seek a formal valuation rather than near term pricing guidance.
The tax events settled by the new class rulings are the most pressing right now, in particular, CGT event D4, which crystallises at BSA signing based on the market value of all credits generated, before any credits have been sold.
But valuation is equally relevant to landholders assessing whether a BSA stacks up financially before they commit, and to developers understanding the true cost of their offset obligations when planning a project.
Get in touch to discuss the most appropriate approach for your situation.
