Future of forestry

Demand for UK forests continues at unprecedented levels, but the market remains constrained by lack of supply and we believe this is unlikely to change over the medium term. The reasons for the current popularity of forestry assets are well documented; strong and rising demand for wood, long rotation lengths, diversification into tangible assets and increasing recognition of the environmental benefits of woodlands, with potentially new opportunities for monetisation. As a result of this popularity capital values have risen at impressive rates. However, for some time now a few voices in the industry have been expressing concern over the sustainability of these price rises and indeed, whether an asset bubble is forming.

An asset bubble can be described as a run-up in prices fuelled by demand, speculation and exuberance. So is this the case with the current market? We believe this is unlikely. While the market is definitely being stimulated by a clear supply-demand imbalance and there is a degree of speculative pricing going on, the nature of forest growth underpins the asset in two ways.

First, biological growth is immune from property market cycles, so it provides investment stability. Second, the productive potential of timber properties will improve as timber prices rise, effectively underwriting rising capital values, and we do not think the top of the cycle has been reached yet. In other words, good timber properties can support these values providing timber sells at current (or higher) levels. It’s also worth noting that forest investors have low levels of gearing and are generally long term in nature, meaning they are able to ride out short term market fluctuations.

We would, however, caution the sentiment that high forest returns are normal. Investment performance has been spectacular, but relies heavily on capital movement not income yield. This means a sale is required to crystallise the performance, which many investors are not wanting to do. While we consider that forest values have scope to rise further, owners must realise that if they want to remain invested, then income yields should become the accepted measure of performance, and these will normally be much lower than on a total return basis, which prices in the asset capital.

Total market – area and value

In line with recent trends, 2018 posted another strong year of value growth for the UK forestry market, with supply down by 19%, but overall market value up by nearly 6%, meaning a 30% increase in average value per gross hectare. Despite this headline figure, it is important to understand that forestry values are influenced by a number of local factors and, therefore, the location, quality and scale of the properties in the sample can skew the result compared to the true average. It does not necessarily follow that there has been such a strong increase across the board.

During the 2018 forest year the total value of the UK forestry investment market increased to £118 million, up from £112 million in 2017, to a figure 14% above the medium term average of £99 million per annum. For the second year in a row the increased market value was against a backdrop of falling supply, with a gross area of 14,750 hectares traded, some 18% below the medium term average. Contraction in supply coupled with increased market value led to a strong increase in the average price per hectare to £8,066 per gross hectare. Our analysis shows that within the area traded, 10,678 hectares was productive forest, giving an average price per net productive hectare of £11,142, up from £9,300 per net productive hectare in 2017.

In 2018, analysis shows the average unproductive area was 28% per property, lower than in 2017 but in line with the medium term average. Unproductive areas include unplanted land (roads, rides, tracks, wayleaves, watercourses, etc) and non-timber species such as broadleaf trees planted for biodiversity.

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