Commercial forestry in the UK showed unprecedented market gains in 2021
Analysis of the sector by Savills rural research suggests a provisional estimate for the average value of a prime forest traded in 2021 is £25,000 per net productive hectare, up from £15,000 in 2020, a rise of over 60%. This exceptional price growth is most concentrated in large scale asset transactions.
The Savills commercial forestry market in minutes highlights several factors driving both these asset values and the growing interest in commercial forestry as follows:
ESG targets – climate change, natural habitat, livelihoods and flood prevention. There is increasing acknowledgement by governments, the public and investors that forestry has a key role to play in the fight against climate change.
Harvesting and trade of timber and forest products. The macro economic outlook for timber is very positive with rising global population growth, along with the growing interest in sustainable living and net zero setting the perfect platform for the demand for sustainable wood based products to increase exponentially.
Ability to improve returns. Forests planted 40 plus years ago when the key motive was tax mitigation now have the potential for improved returns and capital value growth when managed proactively.
Long term capital growth. Investors who are willing to hold assets over the long term will benefit from improved returns based on macro changes in the asset class and the utilisation of timber as a commodity.
Inflation and interest rates. Global recovery from the Covid-19 pandemic will drive higher inflation and greater volatility, leading to increased investment uncertainty. Long-term investments will look increasingly attractive.
Risk resilient. Real assets are favoured for their risk resilience and forestry currently couples a lower risk profile with a strong return profile
Tax benefits. UK forestry remains a tax efficient asset class reflecting the long-term nature of tree growth.
James Adamson head of Savills forestry investment comments, “While factors such as location, access, tree species, average age and timber volume/quantity all have a strong influence on the price paid, intense competition due to the supply demand imbalance is undoubtedly a key factor at play here.
“Due to the prevailing investment conditions post the financial crisis of 2008 many of the best performing asset classes have reached price perfection – this suggests the price is rather high, with investors expecting perfect performance from it and a correspondingly high valuation”.
Forestry seems to be following this pattern, but per hectare valuations for early/mid-rotation timber in excess of £50,000 per hectare should not be seen as either normal or necessarily sustainable suggests Savills research.
Based on current commodity prices an economic forestry model would suggest values should be at around one third of this level. These values have a significant degree of speculation on future performance factored in that may or may not materialise, and it is important that investors understand this.