We may be living in uncertain times and global markets have taken hit after hit, but the forestry sector is revealing some welcome stability, with commercial forestry values increasing by at least 15% in the past year.
That’s the conclusion of the UK Forest Market Report (FMR) 2022, jointly produced by Tilhill, the UK’s leading woodland creation, forest management and timber harvesting company (and part of the BSW Group) and specialist forestry firm Goldcrest Land & Forestry Group. The FMR is widely regarded as the most comprehensive view of the market and of forestry transactions.
The report was launched at the WWT London Wetland Centre (from where it was also livestreamed) and at The Signet Library in Edinburgh on two consecutive days in November and, as well as the headline figures, speakers revealed how investors aiming for net zero through timber assets are influencing commercial forestry values.
The launch event also noted that land available for natural capital projects, including native afforestation, peatland restoration and rewilding has trebled over the past year.
“The wider benefits of trees and woodlands to our society, along with the other naturebased solutions are now at the forefront of the fight against climate change and, as such, are being increasingly recognised,” said Gavin Adkins, Tilhill managing director, in his opening address.
Xander Mahoney, Tilhill’s head of forestry investment, provided the aforementioned headline figures at the launch event. Some £195m-worth of UK forestry assets were observed changing hands in 2022. This was actually 3% lower than in 2021 and in fact the area traded in 2022 – 6,900ha – was down 33% and was the smallest area traded since 2008. However, it’s well worth noting that the market value is now “10 times what it was in the early 2000s”, when the annual average between 2000-2004 was less than £20m.
That increase, said Mr Mahoney, has been driven by high net worth individuals and institutions with a lot of buying power facing constrained supply. He added that this doesn’t look to be changing anytime soon, with interest in forestry assets from institutional investors remaining strong, in spite of the geo-political situation and depressed economy.
He noted that yield class was the biggest indicator of per hectare values, demonstrating a market that was willing to pay a premium for the best assets.
As detailed in the FMR itself, Mr Mahoney went on to highlight that the average size of commercial forest sold this year was down 21% to 122 stocked hectares (from 155 in 2021) but that the average price paid for a commercial forest was £3.4m – up 10% on 2021 (£3m).
The value of a stocked hectare soared by 46% in the last year, from £19,300/ha in 2021 to £28,100/ha in 2022.
Mr Mahoney noted that the mix changed significantly in 2022, with very few inexpensive properties and a small number of expensive ‘outliers’ being traded, leading to the conclusion that the like-for-like change in value was actually lower.
When it comes to the spread of sales around Britain, Scotland increased its market share of forestry transactions by value to a dominant 84%. Wales continued to be the second largest contributor to the market value at 13% and England’s share was similar yearon- year at 3%.
The FMR found that observed transactions for land for tree planting also rose – by almost a quarter (23%) from £53.1m in 2021 to £65.3m in 2022, with an average cost of £16,475 per plantable hectare, up 50% on last year’s £11,000. The actual area of land sold for planting was 4,000ha, which was 17% down on 2021.
Once again, Scotland led the charge, with 85% of the plantable land sold, as well as a 73% increase in the average price to £17,200 per hectare.
The total land planted in the UK rose by 4% (13,850ha), with broadleaves overtaking conifers for the first time since 2016. Some 76% of all new planting – and 93% of total conifer planting – took place in Scotland, although at 10,480ha this was still below the annual planting target of 12,000ha.
“The net result has been to see more market value but, again, a smaller supply of area,” said Mr Mahoney. “My sense is that we have a land-constrained country and while we obviously believe the most efficient way to produce timber is to plant commercial conifer, we don’t have an over-arching land policy in the UK.
“We often hear ‘the right tree in the right place’ but I sometimes worry that that means “no non-native trees anywhere’,” said Mr Mahoney, adding that tight supply and the fact that the UK imports the majority of its timber and has huge afforestation potential “is not lost on people and that opportunity is being increasingly spotted, not just domestically but also internationally”.
“If we want to solve this problem of a lack of commercial forests to have and to sell to people then, as hard as it might be, we have got to plant new ones.”
While England lags behind in terms of transactions in commercial forestry and plantable land, it is at the top of the list when it comes to mixed woodlands – although the market is one-tenth the size of the UK’s commercial forestry market.
In this segment, market value was 81% up on 2021 at £19.4m. The area traded was also up, by 30% to 3,300 acres and England – especially the south-east – dominated with 80% share by value.
“It is very challenging to do commercial forestry in England and this is where amenity value is highest, so there could be a really interesting opportunity for natural capital in England,” said Mr Mahoney.
He added that Wales is “uniquely suitable” for both commercial forestry and for acquiring carbon credits but that this had become a lot more challenging with changes to the Woodland Carbon Code and the Welsh afforestation grant scheme in 2022.
Mr Mahoney also noted the local resistance to tree planting in Wales, saying that there was a feeling among Welsh farmers that their way of life was going to disappear forever because of afforestation.
“We do need to be sensitive about that and figure out how we share the value with the local community,” he said, adding that at the current rate of afforestation it would take “centuries to plant up all the farms in the country”.
To summarise, Mr Mahoney said that 2022 had been another year of forestry gains but that we were now in an economic climate with a huge amount of uncertainty. However, he remains of the view that forestry will continue to present market opportunities thanks to other factors, such as the net zero agenda.
“We are still going to be decarbonising everything because otherwise we’re all going to be toast,” he said. “And that is going to mean not just picking out the cheapest product or supplier but rather the one that is the best value given its carbon footprint.
“We are probably also going to think about on-shoring strategic resources after the disruptions we’ve seen from Covid and what is happening in Ukraine,” he continued. “The globalisation process has driven down prices in the post-war or ‘rise-of-China’ period and we might be starting to reverse that long theme a little bit.
“Both those things – decarbonisation and de-globalisation – have the potential to put upward pressure on prices beyond the current cost of living climate, and who benefits from that? Well, timber fits those themes perfectly. And so does clean energy. What this says to me is that we want to keep going.”
Fenning Welstead, a founding partner of Goldcrest Land & Forestry Group, agreed that “there is a massive future for forestry”.
“We need to be aware that these values come with a potential risk and that it is a developing market, but it has a very strong future,” he said at the FMR launch.
And he also followed up on the message of the need for afforestation, saying that there needed to be major changes in the generation and use of energy and sourcing raw materials.
“To date we have been tinkering around the edges,” he said in the report. “A future with much greater emphasis on renewable energy and raw materials will surely have to rely more on trees. Whatever the vicissitudes along the way, the future of human activity will need more timber. We must keep planting.”
And, as the FMR highlighted, the market value of forests is underpinned by the predicted long-term healthy demand for timber and strong prices.
“Timber was subject to mixed fortunes in 2022, impacted by factors from constrained global supply due to the war in Ukraine and an over-supply of logs in the UK after Storm Arwen forced harvests, to sharp increases in energy demand,” it said. “However, while the market saw major falls in the price of standing timber, this came after previously steep price inflation and values now equate to those seen just three or four years ago.”
“Timber prices tend to be cyclical,” said Mr Welstead, in the report. “UK home-grown timber fell steadily in price from the 1950s through to the early 2000s. The long term trend hid peaks and troughs. We are now seeing rising timber values, which are likely to behave in a similar fashion.
“We are currently in a trough, but the expectation is for prices to recover again and move ahead. The simple laws of supply and demand will apply.”
NATURAL CAPITAL ALPHA
Robert Guest, managing director and colead at Foresight Sustainable Forestry was a guest speaker at the launch of the FMR and also authored an article in the report. He addressed the subject of sustainable land use and natural capital alpha.
Mr Guest said there were several compelling reasons to feel positive about UK forest assets, which have shown strong resilience to financial shocks and inflation. However, the question now was “whether the apparent increase in the risk-free rate must translate into a higher cost of capital for UK land and forestry investment”.
“The theory is clear, but participants may have an ace up their sleeves, natural capital alpha,” he continued.
“With excellent, risk-adjusted return profiles, forestry and afforestation are the ideal entry points for investors looking to enter the land-based sustainable investment space,” he continued in the report.
“Freehold ownership and revenues from the sale of sustainable homegrown timber, as well as tourism, sport, sustainable farming and renewable energy, all provide a strong underpinning.”
Mr Guest concluded that, “if you believe that there is an embedded global supply shortage of sustainable timber and in the concept of natural capital alpha, then this should be a green light moment for the sector”.
