Spotlight: UK Forestry Market

Forest Investment Analysis
 
Forest Investment Analysis

02 April 2015, by Savills Rural Research | @SavillsRuralUK

The total value of forest transactions has increased significantly over the past five years.

Our research on the investment forestry market in Great Britain is based on our transactional database of forest sales. This database collates data from all mainstream forest sales, and where we are aware off-market or private transactions.

The investment forestry market by area sold has remained relatively constant for a number of years, but we have seen a slight contraction (just over a tenth) over the past five years from 16,000 hectares in 2010 to 14,000 hectares in 2014.

click on image below to enlarge

 

GRAPH 1

Total market area

 
Graph 1

Source: Scottish Woodlands and Savills Research

 

The commercial forest area in Great Britain is approximately 1.6 million hectares, of which 1.3 million hectares are located in Scotland, Wales and Northern England (80%), therefore the annual turnover of investment forests represents just over 1% of the commercial forest in these regions.

Whilst the overall turnover of forest area has fallen, the total transaction value has increased significantly (50%) over the past five years from £43.3 million to almost £65 million and reached a peak in 2012 of £73 million (Graph 2).

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GRAPH 2

Market transactions

 
Graph 2

Source: Scottish Woodlands and Savills Research

 

This significant increase in value between 2011 and 2012 correlates to a period of high investor demand leading to increased competition for investment assets. Demand for timber has also strengthened since 2010 in line with an improving economy driven by the resumption of housebuilding activity, increased activity in the distribution sector (pallets) and the continued uptake of low grade wood for biomass. Demand for roundwood from the biomass sector grew from 300,000 tonnes in 2008 to 1.25 million tonnes in 2013, an increase of over 300% in what is an entirely new, not substituted market. The positive effect of improving timber prices has filtered through to improve values.

Over the past three years the value of total market transactions fell slightly reflecting the reduction in area sold coupled with a levelling out of the average values per hectare across the total market (see Graph 3). Based on our analysis the average value per productive (stocked) hectare is around £7,600 per hectare.

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GRAPH 3

Average sale price

 
Graph 3

Source: Scottish Woodlands and Savills Research

 

The relationship between the value of the total (gross) forest area and the productive or harvestable area has changed, especially over the past five years (Graph 3). This is an important measure when appraising investment forests as the area of unplanted or unproductive land can vary considerably, from as little as 5% to as much as 50%. The unproductive area has a relatively low and fairly constant value, therefore the market price, and ultimately the investment performance, is driven by the value of the productive area.

The average proportion of unproductive area in the forests analysed increased from 20% in 2010 to 30% in 2014 and this is a contributory factor to the increasing gap between gross and net productive value per hectare. A proportion of this increase is due to the natural variability in forests and will be unique to the sample period, but as the GB forest estate matures and is restructured going into the second or subsequent rotations the requirement to improve biodiversity through the UK Woodland Assurance Standard has led to a gradual increase in the unproductive land area.

In 2014, the average productive value was £7,600 per hectare; 42% higher than the average gross value at £5,350 per hectare. The annualised rate of value growth over the past five years (2009 to 2014) was stronger (17%) for productive values than for the gross forest area (13%) which reflects the influence of timber price on value over this period. Graph 3 illustrates how net values levelled out more quickly than gross values after 2012 reflecting a slight weakening in the rate of timber price increases in 2012/13 (Graph 5).

As part of our analysis we have sought to identify regional variations in the market. After consideration we split the investment forestry market into four key regions:

1. North Scotland

2. Central Scotland

3. South Scotland

4. England (predominantly northern) and Wales

The highest values are achieved in the south of Scotland and across England and Wales as illustrated in Graph 4. This is because these areas are where the key attributes of good physical growing conditions, relative ease of access and a range of competing wood users come together to provide the best timber growing and marketing conditions. The graph also shows the relationship between the age of the forest and unit value. More detail on the age/price curve and management of forestry is given on Timber Age & Capital Value.

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GRAPH 4

Regional performance (the relationship between forest age and value by region)

 
Graph 4

Source: Scottish Woodlands and Savills Research

 

As would be expected, forest values increase as the age and, therefore, yield of harvestable timber increases. In year five of the production cycle the average value of forests across all regions was around £3,500 to £4,500 per hectare. In the south of Scotland, average values increased exponentially over the next 40 years of growth to around £12,000 per hectare, giving a value increase of 165% or just over 4% per annum, ignoring any inherent annual market capital growth in values.

In England and Wales, where the market is more diverse, average values increased exponentially over the same period to around £8,250 per hectare giving a more muted overall value increase of 85% or just over 2% per annum.

In central Scotland the annual value growth rate was similar to England and Wales but started at a lower base level peaking at just over £7,000 per hectare. This reflects the impact of Argyll and the southern Highlands where rugged terrain and remoteness to timber markets subdues the market price.

The market in the north of Scotland, which includes some of the Scottish islands where timber is grown (including Skye, Mull, Islay, Jura and others), is more diverse and the graph plots a very weak upward trend. This is not because the timber is less valuable as it gets older, but instead reflects a number of very large forests with a high average age, but low quality timber due to very poor physical growing conditions. Therefore the correlation between value and increasing age is much weaker as Graph 4 shows. It is considered by most to be a tertiary investment area.

As we have discussed, timber is a key value driver in investment grade forestry. One of the oldest timber price measures is the Forestry Commission’s Coniferous Standing Sales Price Index which provides a long term trend of timber prices. The index (Graph 5) shows timber prices have generally increased over the past 10 years following a significant period (1985 to 2004) of mainly price falls.

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GRAPH 5

Forestry Commission Index (long term)

 
Graph 5

Source: Forestry Commission

 

In the 2014 harvest year the Index recorded a significant 28.2% nominal increase (25.8% in real terms). This followed two years when timber prices fell slightly after a period of strong growth in 2010 and 2011. Forest value growth lags slightly behind timber prices and we would expect average values to increase in 2015, following strong timber prices during 2014.

 

Footnote 1: Our analysis is for commercial forests where the primary planted species is Sitka spruce, but includes areas of other conifer species commonly grown for timber production. Transactions under 20 hectares and less than £50,000 in value are excluded from the analysis to ensure the emphasis is on investment grade assets.

Footnote 2: Our analysis refers to the traditional Forest Year which runs from 1st October to 30th September. Therefore 2014 refers to the year 1st October 2013 to 30th September 2014.

 

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