Let me take you on a journey to 2030, by which time the world’s population will have increased by 25% to 8.3B. Along with cultural changes, global demand for water will have doubled over this 20-year period. The availability of fresh water from natural sources will have declined at the rate of 6% per annum. Climate change will not only have altered the seasonal pattern of rainfall but will be delivering it in sharper, heavier downpours. Water, which we largely take for granted, is going to become a valuable resource.

The World Water Development Report predicts that in the next 20 years the quantity of water available will decrease by 30% and world demand for water will double every 21 years.

When this is reviewed along with population growth, household growth and cultural diversification, water takes on a long-term economic and intrinsic value that needs to be properly appraised and valued by all sectors.

Addressing water as a separate resource and moving away from the current approach that fails to place a value on water – as opposed to the infrastructure surrounding it – is going to become extremely important. Those relying on water resources in all areas of commerce and industry need to understand the valuation of the raw water resource and how this impacts upon their balance sheets.

In January, the Royal Institution of Chartered Surveyors (RCIS) in the UK took the first step in addressing the valuation of water by launching an information paper The Valuation of Water as a Separate Resource. I chaired the RICS Working Group on the Valuation of Water, and addressed the fact that neither the valuation profession, nor the water industry, had sufficiently grasped or understood the issues of water valuation.

The paper is the first step in addressing the valuation of water. What is apparent from the work that has been undertaken in preparation of this is that there is no definitive methodology for the valuation of water as a separate resource; this means that water as a stand alone asset is not being properly appraised. The RICS is upgrading the current Information Paper to a Guidance Note, with the process commencing in April 2011. In essence, valuers will need to take account of the paper in valuing water resources.

Why is it important to have a robust methodology for the valuation of water, you may ask? Firstly, when valuing the resource, you need to be able to clearly understand the value of the constituent elements, not only now, but into the future. Secondly, bank lending is much tighter and is likely to remain so for the next 20 years.

Although the RICS Working Group addresses the valuation of water from a theoretical point of view, we also use examples to illustrate the methodology such as:

1) 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?

Clearly there is a difference in value since the block of land with the irrigation is able to grow high quality potatoes, carrots, parsnips and even turf. Without that irrigation none of those crops could be produced – at best, a moderate crop of barley. The difference in annual output from that ground could be up to £1500 per acre (US$2400). The only difference between the two blocks of land is the presence of the water in the reservoir. It could be that the market value in the theoretical exercise could differ by as much as £1M (US$1.6M).

2) A 20 acre lake set in an area of high landscape value with strong tourism links. What is the value of this resource?

This is a much more difficult exercise and brings together the two functions of water – utility and environmental. To actually come up with a sensible valuation would require extensive research as to the specific nature and potential use of that resource, but values may vary from £50,000 up to £500,000 (US$81,000-812,000).

(3) A hotel in a top tourist destination in sub Saharan Africa has its own borehole with a reliable private supply of water. What is the value of that water?

In this case the value of the water could be the difference between the hotel being worth millions or literally nothing. In parts of Africa water is an extremely scare commodity, and if you are catering for the top end of the tourist trade, failure to provide showers and flushing toilets may well be the difference between successful trading and bankruptcy. If the only thing standing between those extremes is the water resource, then its value needs to be clearly understood and identified – it may run into the millions.

The whole point about the RICS initiative is that people who own or occupy land or have or are large consumers of water, need to start to think about water as separate resource. Those that rely on water for industry 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

The next part of the process, once you understand the resource and the constituent elements, is to form an opinion on what it is worth. This means being able to sign off a piece of paper that says: ‘The value of this water resource is £M.’

So this is the tricky bit. We understand our resource, where it comes from, what factors impact on it, its availability, reliability, quantity and quality; but, how do we actually get to that financial value? We rely on RICS’ global valuation standards.

Water is the most important, yet undervalued limited resource on the planet. Without it there would be no life on earth. Yet despite this, water is undervalued and used unsustainably. RICS, as a valuation profession, correctly recognised the large gap in their valuation armoury and commissioned this important paper.

Water is something that is largely taken for granted. On a day-to-day basis it is simply there for our disposal. The information paper is the first draft of a methodology that the RICS is now evolving through discussion and feedback, and will ultimately lead to the importance of water throughout the world being more appreciated and, therefore, better managed.

During the course of this work, I became sufficiently inspired by the subject of water as a separate resource that I set up a subsidiary company, Water-Value which aims to engage land and property owners, politicians, investors, water companies and environmental groups in the need to understand and value water as a separate resource. Water-value has been established to fill the gap in this specialist area. For more information, please go to http://www.water-value.com/