Our Spotlight on the UK Forestry Market 2016 reviews the performance of the investment forestry market across Great Britain during the 2015 forest year (1 October 2014 to 30 September 2015).

Our research 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.

Our analysis shows that the overall volume of forestry transactions grew by about 30% to nearly 21,000 hectares in 2015 compared with just over 16,000 in 2014. This follows a period where the area of forestry sold has been fairly constant at around 16,000 hectares a year (Figure 1).

^{Source: Scottish Woodlands and Savills Research}

This rise in the number of hectares sold in 2015 is predominately due to a significant number of off-market sales, which in the 2015 forest year included a portfolio of 16 properties sold by UPM to the Church Commissioners for around £50 million, as well as the disposal of two smaller investment portfolios.

The total area of land sold within these transactions makes up a third of all sales recorded during the year and cannot be classed as ‘normal’ market activity. Adjusting for these portfolios the overall traded area is probably slightly lower than the recent average.

Our research splits the investment forestry market into four key regions:

1. North Scotland

2. Central Scotland

3. South Scotland

4. England and Wales

The 2015 data shows a significant increase in the proportion of land sold in South Scotland (Figure 2), which is largely influenced by the location of properties included in portfolio sales; for instance in the UPM portfolio over three quarters of the total area was located in South Scotland. England and Wales continues to show the smallest average market share by region.

^{Source: Scottish Woodlands and Savills Research}

Total market value

Over the last five years, the cumulative value of the investment forestry market has shown marked growth from around £45 million in 2010 to £137 million in 2015 (see Figure 3).

As would be expected, the increased market area in 2015 has been reflected by a substantial rise of over 60% in the total value of the market compared however, to the previous year. It should be noted that portfolio sales are not annual events and adjusting the data for these would bring the total value of the market more in line with the five year average of £72 million.

^{Source: Scottish Woodlands and Savills Research}

Average values

Our recent research shows a continuation of the general upward trend in average plantation values (Figure 4).

As with the agricultural land market, average forestry values are diverse, and factors such as location, quality, access, timber species and plantation age all have a bearing on the price paid.

According to our analysis of the 2015 sales data, the average value per productive hectare [measured as the land area of a property stocked with trees capable of producing an end crop of timber] rose by 13.5% during the 2015 forest year to £8,615 per hectare. This is 21% higher than the average gross value [total property area] at £7,118 per hectare. The annualised rate of value growth over the past five years (2010- 2015) was similar for net productive hectare and gross hectare at 16% and 17% respectively.

A wider gap between gross and net price tends to correlate to periods of stronger market competition. The value per productive hectare tends to track timber price more closely as illustrated in Figure 4, where between 2012 and 2014 the productive area value levelled out before rising steeply between 2014 and mid-2015, when timber prices were strong.

^{Source: Scottish Woodlands and Savills Research}

Regional performance

As reported in our 2015 Spotlight on the Forestry Investment Market the highest values continue to be achieved within the South Scotland region and then across England and Wales (Figure 5).

^{Source: Scottish Woodlands and Savills Research}

This correlates to the importance of South Scotland and the Borders area to timber production and also the general scarcity of forest property transactions in England and Wales, leading to a slightly different pricing structure.

Our research on regional performance by value and age illustrates how forest values increase with age, driven by the accumulating stock of available timber and the reducing time until income realisation.

It is interesting to note that the value of younger forests in England and Wales has increased significantly from around £4,500 per hectare in our 2014 analysis to £6,500 per hectare, without a commensurate increase to the value of older property in this region, therefore flattening the price-age profile.

In our research we have looked at regional market trends. Figure 6 shows the percentage difference between the gross property area and the net productive area of property traded in the four analysis regions.

It can be seen that there is a smaller gap between the gross and net productive area in England and Wales with the widest gap in North Scotland. Our research into gross and net values indicates that there is a fairly consistent gap between the gross and net values but with a change in rank in average price observed between net and gross; South Scotland is the top performing region based on net productive area, but England and Wales is the top performing region on average price per gross area.

This reflects the different nature of property between the regions with many woods in England and Wales stocked from ‘fence to fence’ with little open space beyond rides and roads.

Furthermore, the smaller nature of the market in England and Wales means that scarcity and competition for property are also likely to accelerate values above those supported by pure timber economics, whereas in South Scotland, productive capacity is a primary driver of value.

^{Source: Scottish Woodlands and Savills Research}

Timber prices

The Forestry Commission’s Timber Price Indices for Coniferous Standing Sales (Figure 7) published in November 2015 shows that there has been an overall increase in the index over the last 12 years, following an overall decrease in earlier years. The index was 1.2% higher in real terms in the year to September 2015, compared with the previous year.

^{Source: Forestry Commission}

However, these figures mask the slowdown in the timber market experienced over 2015 when the sawn softwood/sawlog market finally lost momentum after almost twelve months of continuous upwards price movement. The influence of price pressure exerted by sawn timber imports became increasingly evident throughout the year and domestic carcassing prices fell by over 10%.

The wood-based panels sector benefited from the increase in new house building but it was not immune from the strength of sterling and the effect of the lower price of imports combined with overproduction of certain categories in Europe. Over the period the average value of sawlogs dropped by 6% but the average price of small roundwood remained unchanged. The stability in the small roundwood market was undoubtedly underpinned by the demand from the biomass energy producers and the wood-based panel manufacturers.

The main influence in the downward price pressure on the timber market is currency. During the analysis period the pound strengthened against the Euro by around 8% and Swedish Krona (Figure 8) by about 10%.

This allowed imports of sawn timber to undercut domestic producers leading to a reduction in demand for home grown construction timber. This not only impacted sawn timber imports, but also on our competitiveness with timber product exports including paper.

Growers have benefited from the long period of strong demand and high prices but 2015 was a more difficult year for timber values. There has been a need to rebase prices for logs and standing timber to reflect the impact of imports whilst the exchange rate is unfavourable.

There are [Winter 2015] fresh indicators of a weakening in Sterling around discussion on a possible BREXIT and there are also signs that some of the most important EU industrial economies are recovering which should strengthen the Euro in the medium term. In addition there is a still healthy demand for wood products.

Despite the current downturn in the price processors are able to pay for logs, the demand for standing sales (especially of certified timber) will increase as we move further into 2016 and sawmill stocks are increased to supply increasing demand for construction timber. This should help strengthen roundwood prices.

^{Source: The Bank of England and Savills Research}

FULL VALUE

Marketing woodland

The UK forestry market has recently been dominated by a small number of very active buyers, but wider interest in forestry as an investment is increasing. Active and appropriate marketing of forests continues to attract new buyers into commercial forestry, which can only be a good thing for sellers, and for the wider industry.

For those contemplating a sale, presenting the property well and resolving any outstanding issues prior to marketing is essential. Purchasing solicitors are now forensic in their approach, and unforeseen issues which lead to a delay in progressing a sale can put the whole sale in jeopardy. The title boundaries and physical boundaries of forestry properties are notorious for not marrying up. Resolve these prior to marketing, as trying to do so after an offer has been accepted will result in significant delays and potentially deals falling through.

The primary focus of forestry investors will be on the timber crop. Ensure crop records and compartment plans are accurate and up to date. By making these accurate, purchasers will be reassured, and importantly the full stocked area of the forest will be used when they come to analyse the level of their offer.

Finally, first impressions do count, even for commercial forestry. If a forest looks well managed purchasers will assume that it is well managed. This can be achieved by ensuring that gates swing freely, internal tracks are passable, and where feasible areas of windblow are cleared prior to marketing. A period of modest expenditure prior to marketing may reap great rewards when it comes to receiving offers.