A Brief Outline Of Forest Assets And Their Valuation
By Eugene Hendrick and Henry Phillips
By Eugene Hendrick and Henry Phillips
What is a forest asset?
There are many definitions of what constitutes a forest. However according to the National Forest Inventory (NFI), forest is defined as land with a minimum area of 0.1 ha, a minimum width of 20m, trees higher than 5 m and a canopy cover of more than 20% within the forest boundary. Although this minimum size is quite small, in practice the average forest holding is circa 8 ha. The vast majority of forests in Ireland are not native and have been planted over the past century.
A forest asset comprises the land and trees and accompanying potential income streams. The underlying assumption is that the asset will remain in forest permanently; providing a long-term stream of income or other values that the landowner seeks. There is no obligation on owners to adopt one form of forestry over another as for example a clearfell system or a form of continuous cover forestry (CCF). The essential requirement is to maintain forest cover in accordance with environmental requirements. Most owners will seek a monetary income from their forest asset and a fair price for roundwood sold or other forest products or services traded. They will also seek to maximise the value from the sale of the forest asset, including land ownership, if that is what they decide.
Until relatively recently forests as an asset class have been not widely recognised. Forests have historically provided strong diversification from traditional asset classes as for example property or equities since trees grow regardless of financial market conditions as for example in the crash of 2008 and the more recent slowdown due to COVID.
Why forest asset valuation?
Forest valuation provides an estimate of the market value on a forest asset, or a part of the asset, whether or not the intention is to sell the land and/or the forest crop. While income from roundwood (timber) sales is market based - Ireland has a well-developed softwood processing sector - valuation helps to protect the interest of the owner/seller by providing an independent benchmark market price.
Valuation can also be used to determine the level of insurance required against risks such as fire and windthrow, or for inheritance or other non-market transfers. While the market ultimately decides the monetary value of a forest asset it is always useful to have an independent valuation for sales purposes.
Valuation methods
As with most assets there are four possible methods to determine value (1) transaction based, (2) cost based, (3) immediate liquidation and (4) expectation. Cost based and immediate liquidation methods will tend to underestimate the forest value. Transaction based is the preferred method but recent sales are not always directly comparable due to variations in the stage of forest development, productivity, access, species and location. The expectation or discounted cash flow method is the most widely used.
What is included in the valuation?
A forest asset valuation is based on any future forest premiums or grants payable, future income from roundwood (timber sales) over the forest growth cycle, other potential income streams, less costs such as maintenance and insurance. All incomes and costs are brought to the present, in order to compare like with like1.
Other potential income streams such as forest carbon can also have a value in certain markets and these may add value to the asset. The Woodland Carbon Code2 in the UK sets out the requirements for voluntary forestry projects where the carbon sequestered is measured and traded. Carbon asset valuation is likely to come further into play in the future and provide an additional income stream. However, it is essential to have the carbon assets registered and traded through a recognised platform in order to provide transparency and avoid double counting.
Valuation also takes into account the tree species composition of the forest. Currently sawmills and panel mills are geared to use conifer species mainly spruce. Minor species can be difficult to sell due to either limited or undeveloped markets. Recent planting has seen a welcome increase in the amount of broadleaves, especially native species. However the market for broadleaves is very small and not as yet well developed.
The stocking level of the forest (how many trees to the hectare or acre), the current and future levels of thinning or not thinning and the intended date of final felling, or stage of conversion to continuous cover forest (CCF) all have an influence on the level of valuation of the asset.
Access for harvest machinery and timber hauliers is an important consideration in any valuation. Good clearly defined access is reflected in higher valuation estimates while poor access along a disputed or inadequate right-of-way (ROW) has the opposite effect. Similarly clear well defined title to the land and forest is prerequisite for any valuation where the intention is to sell the forest asset.
As in all asset valuations assumptions are made on income levels (for example the price of roundwood (timber)), costs (for example maintenance, licensing, roading and insurance costs) and on the capacity of the market to process future timber sales. Usually roundwood values are based on long-term average prices, not current prices, as these can vary significantly year on year. Forests approaching clearfell use shorter term average prices (three to five years) while young or middle aged forests typically use seven year averages.
Valuing the forest land
There is an emerging but limited market in Ireland for reforestation land with a replanting obligation attached. It may not be possible to use any former or recent transaction evidence to support a value for the bare land following clearfell. If this is the case then the approach is to calculate the land expectation value (LEV) and use this as the basis for the land value. This provides a measure of the profitability of a forest investment in bare land or more simply the value of land used for growing timber. It represents the maximum price that a purchaser should be willing to pay for the bare land in order to achieve the required rate of return.
Other things that may be considered in valuing a forest asset
As well as the items outlined above well maintained forest areas, with good access will generally command a higher price at sale (if the land is also being sold). In certain cases the presence of amenity areas or water features can add to value, but these items are difficult to value.
The size (area) of the forest is taken into consideration as small areas are unattractive to timber purchasers and contractors alike as they can incur higher costs for harvesting and reforestation. Larger areas, especially if a single block, can add value to the valuation.
If the forest is located beside open moorland then there is an increased risk of fire which will reduce the value. Similarly if there is evidence of the presence of disease or insect pests, anti-social behaviour (dumping) or trespass then the value will reduce.
Wind is one of the biggest risks to plantation forests. If there is evidence of windthrow then the crop may have to be felled prematurely and result in reduced timber revenues which in turn are reflected in a lower forest valuation.
If forests are clearfelled they must be reforested to full stocking to comply with the Forestry Act. Additional conditions may be stipulated in the felling licence which is required before any felling commences. Adherence to the conditions is mandatory.
Some valuations take reforestation costs into consideration as well as future roundwood sales from the reforested area especially if the forest is approaching clearfell. Given the length of time for the income to accrue from the reforested area, the value of these income streams is given a low current value in the valuation process.
Is there any benefit of having a forest management plan in place to add to the asset value?
Forest management plans (FMPs), whether a simple one to comply with DAFM requirements or a more comprehensive one for the purposes of forest certification are always a good idea and provide guidance for the proper management of the asset. Having a current FMP will not impact on the asset valuation. It may however reduce the cost for undertaking a valuation.
What is valuation likely to cost me as a forest owner?
The cost of a valuation depends on whether it is field based requiring the valuer to visit the forest, take measurement plots, walk the area and undertake a forest inventory or desk based valuation using forest data taken from a current forest management plan or recent forest inventory. A desk based valuation can cost in the region of €250 to €300 depending on area and degree of complexity. A field based valuation will cost more and again depends on area, the stage of development of the forest, degree of complexity etc. The cost can vary from €600 up to €1,200 and more.
How long does a valuation last?
A forest valuation has a limited lifespan due to a combination of factors including changes in timber prices / timber markets, degree of maturity of the forest, any incidence of disease or wind damage etc. It is advisable to update a valuation where the intention is to sell the asset so that the valuation reflects the current market values insofar as is possible. Updating a valuation is straightforward, especially where the original valuation was field based.
Who to contact to have a forest asset valued and engagement with the valuation?
Forest valuation is done by competent persons using well established and accepted procedures such as outlined in the COFORD publication and which take account of all incomes and outgoings over a defined future period.
There are number of web sites that list forestry consultants who are available to undertake a forest valuation on a confidential and individual basis. An example is the website of the Association of Irish Forestry Consultants (AIFC3). The Irish Timber Growers Association annual yearbook4 provides a listing of forestry companies and forestry consultants and the range of services they provide including forest valuation. It is strongly advised that forest owners should fully engage with the valuation process in terms of their intentions regarding thinning, the level of income they expect from the asset and so on. These inputs are important in finding out what the asset will be worth either today or into the future. Of course the levels of thinning or felling age need to be adhered to if the valuation is to be accurate. Many forest-owners seeking a valuation will have the intention to sell the asset in the near future, and in those cases the valuation will be based on likely future management of the asset based on good forestry practice.
What should my forest valuation contain?
As a minimum a forest valuation should contain (a) a location and forest map, (b) summary of the status of the forest i.e. species, productivity (yield class), area, age, thinning status, (c) access details, (d) what costs and revenues are included and their basis, (e) any factor(s) which influenced the valuation and (f) a valuation for the timber crop and a valuation for the land and the method(s) used to arrive at the valuation.
- For those seeking further information, forest valuation procedures are fully outlined in A Guide to the Valuation of Commercial Forest Plantations published by COFORD http://www.coford.ie/publications/books/
- https://woodlandcarboncode.org.uk/
- www.aifc.ie
- www.forestryyearbook.ie
