Experts identify trends and issues in forestry market

The past two decades have seen exceptional returns for forestry in the UK, matching and exceeding most other asset classes. Current projections also show increasing demand for timber, which bodes well for the long-term future of the sector.

But with prices having faltered in the past few years, RICS organised a webinar in January on forestry as an asset class in the UK and Ireland, bringing together experts to discuss trends and challenges in the market.

He advised that valuations of woodlands and forests, as with those for any property asset, are required for many different purposes and, as such, different bases may apply. The obvious one is market value but others might be required, such as for accounting purposes. There are also challenges for valuing the land and the growing crop as well as the combined asset.

Woodlands and forests are a diverse resource and many variables affect both the land and the crop as it grows. In addition, specialist survey and timber measurement techniques may be needed to determine the quantity and quality of the timber.

Woodlands can also provide a range of income – in addition to the sale of timber, other benefits include habitats for wildlife, adding amenity to the surrounding areas and, more recently, the sale of ecosystem services such as carbon or biodiversity offsetting. Market evidence may be scarce, though, and there are a range of purchaser motivations and changing demand patterns.

It's important to look into non-timber opportunities such as carbon sequestration: the emergence of markets for natural capital and ecosystem services offer opportunities to derive income from the environmental benefits of woodlands that must be considered.

Since the first edition of the standard was published in 2010 there has among other things been a significant increase in timber prices, making the assessment of standing timber all the more important as part of the valuation.

Such alternative strategies include investment in higher-yield assets classes; for example, commercial woodlands. In addition, low interest rates from March 2009 also improved the rationale for investing in lower-yield assets such as forests.

In the second presentation, Savills head of forestry investment James Adamson advised that all this led to a competitive marketplace with rival bids for many woodlands, as a result of which average prices rose about 1,600% over 20 years.

He noted that, if you'd invested £1 in forestry in 2002, you'd have nearly £16 by the end of 2022. This makes it extremely challenging to value because you're always chasing these variable market rises, often over a very short time.

However, he went on to point out that 2023 and 2024 saw fewer transactions and less competition, which he felt is probably linked to the increases in interest rates since September 2022.

The market has also seen falling prices for timber, increased cost of capital and a general softening in investor sentiment. Average values for commercial forests may have fallen by up to 25% since the heights of 2022, so Adamson advised valuers to be cautious and thorough.

Where this is the case, discounted cash flow over the period of forest rotation could be used to benchmark values; however, he pointed out that valuers must also be certain that both the inputs and discount rates are appropriate because small changes can have significant effects on the valuation output.

He emphasised the need to canvass sentiment among other agents and, where possible, buyers in the market. His view is that the outlook for forestry investment remains positive due to the level of interest in the sector and in natural resources. In particular, if timber prices improve, interest rates decrease or there is a change in the tax regime, he thinks investors will come back in larger numbers.

He also discussed buying suitable land specifically for afforestation, a sector that boomed not long ago. This market saw a six-year rise to a peak at the end of 2021 into early 2022, but like existing forests has slowed over the past couple of years.

Adamson thinks this slowdown was due to a combination of investors' nervousness about rising interest rates and therefore the cost of capital, and about grant funding being unreliable with the prospect of constraints following the ongoing government spending review.

Uncertainty also remains about the potential of the carbon market and how to value it, and speculation about future prices. When considering plantations created in the past ten years, the question to ask is how productive they are going to be in the future in terms of timber.

In addition, he observed that those who are buying woodland are being much more careful about what they are purchasing. While the commercial forestry market is still good, he has seen a drop in prices in the past two to three years, mainly due to the falling value of timber.

Tustin stressed that people are coming back into commercial forestry and selling where it is reasonably priced; conversely, he is aware of one or two commercial forests that have come on to the market and have been difficult to sell due to the vendor's expectations.

He outlined that the amenity market is quieter, and there seem to be fewer people interested in buying these properties. He believes there are a number of reasons for this, the key being the lack of income that such assets produce.

This divergence between the commercial and amenity markets is making it hard for those valuing these assets. Woodlands have to be classified, into primarily commercial or primarily investment woodlands and amenity woodlands, and comparables are hard to find, which adds to the difficulties of valuation.

Other market challenges include interest rates of 4‒5% and expectations that assets will produce a similar level of returns, even though the reality is that many woodlands don't. Tustin also referred to the potential implications of inheritance tax increasing to 20% on woodland assets worth more than £1m if they are run commercially, although he doesn't think that will have a significant impact on the market as commercial woodlands are still an attractive long-term investment.

Some clients are talking about legally removing trees by scrapping management plans and applying for more productive felling licences to reduce their inheritance tax bill, which is an interesting use of the taxation system.

Another factor is that timber prices are closely tied to woodland values, and at the moment the increase in the former is expected to be low: this is because every so often, a large and unanticipated volume of timber comes to the market because it has fallen or needs felling following heavy winds. This can take a few years to clear, and during that time timber buyers pay less than they might have expected. Climate change is increasing the frequency of such weather.

Tustin reminded us that the forestry market also includes the markets for land or land afforestation. After prices rose substantially in 2020/21, they have now settled and land is no longer achieving the levels that many thought it might. This is largely due to tight regulations around planting and the increased risk for purchasers.

Tom McDonald runs a small rural practice in the Republic of Ireland that is primarily involved in agriculture, forestry and real estate. He observed that people from the UK might think Ireland is mainly an agricultural country; however, in the third quarter of 2024 agriculture, forestry and fishing contributed only 1.2% to national GDP. Real estate meanwhile contributed 6% and industry, excluding construction, contributed 31%, so the forestry sector in Ireland is quite small and is in fact driven by industrial demand.

McDonald outlined that Ireland has slightly less than 12% national forest cover at present, and the current price of land for agriculture is averaging about €39,500 a hectare (€16,000 an acre). It's difficult for forestry to compete for land with other types of agriculture; for instance, the huge global demand for beef and dairy, which in Ireland is doing very well.

Ireland has an annual afforestation target of about 8,000ha, although this is not currently being achieved. There are many reasons for this, the price of land being one. Only about 25% of the target is currently being met. In addition there are other competing assets, such as solar farms, and there is considerable impetus in Ireland to build wind farms as well.

Forestry is not the only renewable asset and it will not solve all the problems associated with climate change. He said that this complicated landscape can be a problem for valuers who only specialise in forestry, because they are also going to come up against other valuations that will have taken renewables into consideration.

Another challenge is disease. Ireland has experienced ash dieback since it was first introduced in 2012 from imported plants, as well as other diseases. There have also been issues with arbitrations and disputes in relation to valuations, so he complimented RICS on Valuation of woodlands and forests for providing arbitrators with an understanding of how such assets are valued.

In February Michael Healy-Rae was appointed as minister of state at the Department of Agriculture, Food and the Marine with special responsibility for forestry, which is an opportunity to promote this as an asset class. McDonald would like Ireland to protect its forestry, and further recommends the creation of a dedicated Forest Development Agency.

Finally, there is currently strong demand for commercial forestry in Ireland. He noted that groups such as Gresham House, a UK-based company, are very active in the Irish market. Other international firms are also looking to buy forestry as an asset class.

McDonald's view is that forestry achieved such high prices during COVID-19 because of the lack of imports. While standing timber prices have come down again they are still viable, and he thinks the demand for commercial forestry in Ireland will continue.

The panellists' presentations were followed by an in-depth question and answer session, which drew out further key insights on this asset class.