Record-breaking prices

Forestry has long been considered a strong performer in terms of land-based investments. The ability to own land, as well as the profitability of producing an income from the timber and capital appreciation over the long term, has appealed to investors. The upward trend in commercial forestry prices started in the early 2000s, and recent years have seen strong rises in capital values. However, during the 2021 forest year, commercial forest values rose further and at an extraordinary rate.

Traditionally in the UK, forestry has been seen as a niche asset suited to wealth preservation. This and the increased political urgency around the effects of climate change and biodiversity loss have led to an unprecedented interest and competition for forestry as an investment class. As the 2021 forest year closed on 30 September 2021, our research analyses Savills transactional database of forest sales, which includes all data from mainstream forestry transactions and, where we are aware, off-market or private sales. Although at the time of writing, it is too early to have knowledge of every sale completed to the end of the 2021 forest year, according to our preliminary research, average prices are higher than ever before.

Why the increasing interest in commercial forestry?

The traditional drivers maintain interest in timber forests, but new factors fuelled by the climate crises have acted as a strong stimulant to interest;

Against a backdrop of restricted supply of productive forests for sale, there is increasing acknowledgement by governments, the public and investors that forestry has a key role to play in the fight against climate change. Additionally, there is an increased recognition that traditional approaches to investment may no longer be enough to achieve investment goals that meet Environmental, Social and Governance (ESG) objectives. This has introduced new investment capital to the marketplace via professionally managed funds. This institutionalisation of demand provides much greater purchasing power and short capital deployment horizons, fuelling competition amongst buyers.

The income derived from the forest in terms of timber production has traditionally been a principal driver for investment in woodlands. The macroeconomic 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. In January 2021, the UK government set out plans to radically improve the energy performance of new homes, with all homes to be zero carbon ready by 2025. These homes are expected to produce 75–80% lower carbon emissions compared to current levels. Timber and wood fibre insulation will play a vital part in meeting these targets.

Many UK forests are a product of the 1970s and 1980s when the only driver was income tax mitigation. The resulting generation of forests suffer from poor design, species choice, lack of infrastructure and the limited seed source availability of planting stock at that time. These assets show strong performance growth as felling and restocking improves tree stock and sites benefit from installed infrastructure, adding value.

Forestry assets require careful management. 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, not just micro-changes in forest management.

UK investors have enjoyed the market benefits of low interest rates and low inflation for some time, driving performance across the spectrum of investment classes. 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.

Real assets are favoured for their risk resilience, and forestry currently couples a lower risk profile with a strong return profile.

UK forestry remains a tax-efficient asset class reflecting the long-term nature of tree growth. While this is less of a market driver than ten years ago, all the same benefits remain in place.

Values

Our April 2021 Spotlight on the UK Forestry market reported 2020 as a record-breaking year in terms of the total value of forestry transacted (£205 million), along with an increase in the average price per hectare. However, our recent analysis indicates the 2021 forest year has broken all records, with average net productive values rising to just under £25,000 per hectare.

Intense competition in the market and a willingness from investors to step away from conventional pricing metrics have resulted in the sale price of several best in class commercial forest properties exceeding the asking price by over 100% and most achieving considerably more than expected.

Although every forestry transaction is unique and averages do hide regional variations, over the last decade average forestry values have increased by around 370%. During this period, growth has been steady and strong, but close analysis reveals the average price paid for a hectare of productive forestry has astonishingly doubled since October 2019 and trebled since October 2014 (see chart below).

The unprecedented strength of the market is further demonstrated as 40% of transactions during the 2021 forest year achieved over £30,000 per hectare, compared to 5% during the 2020 forest year. In fact, the market has witnessed a number of forest properties selling at record prices, between £40,000 and £55,000 per net productive hectare during the 2021 year.

Regional focus

Our regional research shows for the small sample of forests sold within England and Wales, net productive values have potentially doubled during the 2021 harvest year, compared to those sold during 2020. South and central Scotland also witnessed 93% and 70% increases in average value growth, respectively (see chart below). Prices continue to be lower in north Scotland, and average values have not seen the dramatic hikes witnessed in the more southerly regions due to a combination of strong value growth already seen here over the last two years and generally lower productivity forests.

Outlook

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 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 nor necessarily sustainable, against an economic forestry model that would suggest they should be at around one-third of this level based on current commodity prices. 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.

^{Analysis methodology:}

^{Our research analyses our transactional database of forest sales. This database collates data from all mainstream forestry transactions over 20 hectares in area, and where we are aware, off-market or private sales. While every effort is taken to ensure all transactions are included within the information presented within this publication, it is very likely that further sales are reported after our publishing.}