How much is your forest worth now?
What is the capital value of a forest at any given point in time? It is a question that is frequently asked, sometimes over the telephone, and there is never a straightforward answer.
There are a number of attributes that place forestry in a class apart from other landed assets. For one thing, unlike more conventional commercial property, the income is infrequent, and loaded at the end of the crop's rotation.
Conversely, much of the expenditure is undertaken in the early years. In addition, very little forestry is traded in Ireland, so the benchmark of prices achieved for comparable properties, which is fundamental to the valuation of land and landed assets, is almost non-existent.
A further complication is that, if the plantation has been established since 1993, it was done so with the benefit of a 100pc planting grant, and the rates of annual premium not only differ considerably between eligible farmers and non-farmers but also vary according to the type of land and species planted. Incentives, be they grants or tax measures, invariably have an influence on the 'open' market and can dictate the outcome of a sale -- the value of unexpired premiums in the hands of a farmer is much greater than the reduced rate available to a non-farmer. As a result, a willing purchaser may not always meet the perfectly reasonable expectations of a vendor.
With the advent of the current grant and premium scheme, prices paid for bare land suitable for planting rose rapidly from mid-1993, and by 1994 there had been a five-fold increase in the price of planting land compared to just a year or two previously.
Forestry is a permanent change of land use, so there is a transfer of value from the land to the growing crop. The residual value of underlying land is an increasingly small fraction of the total as the crop matures, and bizarrely, it is occasionally possible to show a negative value for the land.
The most widely adopted method of valuation is net present value (NPV), also called net discounted revenue (NDR). With this method, future costs and returns are predicted and discounted back to the present day at a target rate of interest. The rate can vary according to requirements or expectations, but it is commonly in the region of 4-7pc.