The Farm Forest

Valuations arise for a variety of reasons such as family settlements, banking requirements, insurance claims, family mediation, compulsory purchase orders, utilities (such as ESB compensation and phone masts), litigation issues, stamp duty arbitration, as well as sale and purchase transactions and balance sheet valuations.

Valuations are never an exact science. Careful consideration of all the relevant factors and attention to detail should normally produce fairly consistent valuations. However we still come across considerable discrepancies and misunderstandings about the valuation of young woodlands. Most of these arise where valuers, perhaps highly competent in other areas but inexperienced in woodland matters, take superficial figures without a real understanding of the fundamentals – somewhat like valuing a farm in Longford on the basis of a report about land values in South Dublin.

Factors Determining the Value of Standing Timber
Put simply, the value is the present value of monies to be received, less expenses, at predicted future dates for projected volumes of specified timber. This is easier to calculate for conifers than for broadleaves. A report should state all major assumptions and, depending on the report context, might refer to risk, sensitivity and cash-flow.

Timber Volume An experienced professional forester will forecast quite accurately, with use of the appropriate support tools, the likely productivity and resulting volume of timber from a spruce site. The increasing diversity of young plantations, both in terms of species and mixtures, makes projections somewhat more speculative. Unplanted areas and areas of biodiversity need to be calculated and factored out.

Price Predicting price is more problematical. Prices must be related to log size and end use taking account of extraction costs. A weighted average price should give a reasonable representation of market expectations although, of course, the valuer should always look to underlying trends. Price will be driven by many factors – demand being the most significant.

Discount rate The appropriate discount rate has to be considered in the context of alternative opportunities - the lower the discounting rate, the higher the value. Traditionalists would argue that a real rate (net of inflation) of 3 to 3.5% is appropriate for forestry but this may not stand up to comparison with equities and other markets over the last 20 years. Rates in the range of 4.5% to 6.5% might be appropriate with a tendency to the higher end, depending on risk and other factors. Current market rates must also be considered, particularly for older plantations.

Quality is also a very significant factor, particularly with hardwoods and increasingly so with softwoods. Shaping and pruning have a significant influence on the quality of the final crop. Whether quality crops will get a premium price is difficult to say; looked at more perversely it is likely that many sawmills will not pay full price for, or perhaps even accept, less well-presented timber. Certification will also be an issue – forest certification is a tool for assessing whether the forest management practices are sustainable and for ensuring that the impact of forestry operations is environmentally, socially and economically sound. The bigger sawmills and wood processors may demand certification.

Other Factors
Farmer premium There are various other factors which affect the value of a plantation. The forest premium income is the most important for younger plantations. This income is tax-free and is quite significant in the overall returns.

Only a “qualifying farmer” is normally eligible for the farmer rate of premium, (although family members who inherit may continue to benefit from the higher premium payments.). If a farmer sells a five year old plantation to a non-qualifying person, the premium income could be as little as one third of that available to the farmer and payable only for a further ten years instead of fifteen. Clearly a qualifying farmer who can continue to secure the farmer rate of premium can justify a higher price than a non-farmer.

The valuation of the premium income is further complicated by the lower rates applying to older forest premium schemes. In reaching a valuation the premium income position needs to be carefully checked, and the up-to-date position regarding payment established.

Location, Access & Scale
A five hectare plantation comprising three different species at the back end of a remote farm cannot deliver the same value as fifteen hectares of 20% diverse conifers beside a secondary road.

Non – timber issues

There are non-timber factors which can affect valuations.
• Everybody is familiar with the ‘shrinking’ size of the country. Areas once considered remote are now potential sites for houses.
• Shooting rights can be a valuable additional source of income.
• Some potential purchasers may place a value on the amenity aspect where remoteness becomes a virtue.
• Trading of carbon credits - this should develop significantly
• Taxation - Income arising from the occupation of woodlands managed on a commercial basis with a view to profit is tax exempt– making older plantations attractive to higher taxpayers. Despite the reduction in capital taxation (CAT and CGT), woodlands have a role in estate planning in appropriate circumstances, particularly with the changes to indexation and roll-over relief.

Grants

The grants position should be reviewed in carrying out a valuation. Have the grants been paid and if not, why not and to whom are they payable?

Land Under current legislation there is an obligation to re-plant following clearfelling of trees. Therefore forest lands are committed in effect, in perpetuity, to forestry. This reduces the options for uses other than forestry and indeed has been an occasional discouragement when there is no wish to prejudice future generations. The residual land value should normally only be looked at in terms of the value of subsequent rotations and is generally not a major factor in valuation. Site options should be considered in the context of planning, services and legal obligations. The demand for rural housing is likely to lead over time to enhanced values for residential sites in forest settings.
Risk It is possible to insure against some of the more obvious risks such as fire and wind and indeed that is highly recommended. Irish forestry is virtually disease-free and our island position helps us maintain this. A prudent valuer will tend to take a cautious view of a forestry investment given its long-term nature. It is not possible normally to convert a forest plantation into cash overnight. Indeed for some investors the attraction has been to protect family assets from easy liquidation! And remember that the trees will grow no matter how the ISEQ or the Dow-Jones share indices are doing!

Planning
When you are planning afforestation set your objectives. If you are planting up a few wet or infertile fields that are not delivering in agricultural terms then, while they will enhance the overall farm value, they will not be a stand-alone forest enterprise and will rarely, if ever, be saleable as a separate unit. On the other hand if you are converting a considerable part of your holding or extending your holding by acquiring forestry land then take very careful consideration of factors such as location, access and scale. We recommend a minimum of 8 hectares and ideally over 12 hectares. Access to a road is important. You would be unlikely to buy a farm, the only access to which was through another farmer’s land across three or four fields. Don’t expect anyone else to buy such a forest from you.

Objectives
For some people involved in forestry it is almost heresy to discuss woodlands in terms of valuation - “knowing the price of everything and the value of nothing”. For others it is a fundamental issue driving their decisions. For all it is a question of identifying objectives when embarking on a forestry project. If you are doing it for purely aesthetic reasons then do not expect everyone to be prepared to place a high value on that which you cherish. If you are planting some poorer land primarily for income reasons, then remember that it may not be possible to dispose of your forest area, except as an integral part of your farm holding. If you are going into forestry to improve your income and maintain or improve the capital value of your assets then careful attention to detail, with an eye to a future sale, is likely to considerably enhance your asset. Mistakes are not easily undone and will be more obvious to a future purchaser than to you.

Selling or Buying?
If you are going to sell, a preliminary assessment from a forester may save you some headaches and make you some money. Attend also to smaller matters. A couple of stiles and inspection paths can greatly facilitate access and inspection. When it comes to selling, engaging an experienced and reputable forestry company or forester, working with an auctioneer or land agent, is likely to attract the best possible spread of potential purchasers. The forester or forestry company is likely to have a broad range of contacts with potential investors and the auctioneer will have the local knowledge.

If you are proposing to purchase a plantation, engage a professional forester, with access to solid financial skills and commercial experience, to prepare an assessment.

Legal
Having dealt with plantation sales and purchases for near on twenty years or so, it is surprising how many transactions are delayed or frustrated due to title issues. Check out your title, the position regarding access and any rights or burdens. Before selling, ask your solicitor for an assurance that all is in order or, if not, what is required to remedy it.

If you are disposing of a plantation, you almost certainly have obligations to the Forest Service and you should always get advice on this and other aspects before entering into any legally binding arrangement. The 1946 Forestry Act applies to all plantations.

The value of standing trees is exempt from stamp duty on a transfer by sale or lease (S.120, 1990 FA). There may be other legal and taxation restrictions and conditions related to the sale and the associated stamp duty and advice should be taken pre-contract if buying a woodland, particularly where it is part of a larger land holding. Again an experienced forester or forestry company will be able to guide you on this and related matters. Professional advice should always be taken on legal and taxation matters.

Note: This was prepared in January 2003 – check for any changes since.