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.
The convention is to ignore any effects of possible inflation, as this cannot be predicted. Therefore, the return is regarded as a 'real' rate of return. Future costs are based on the actual costs for a given operation at the time. The returns are calculated by reference to historic prices paid for timber over a number of years and indexed and averaged to the present day.
In years past, there was total reliance on the prices achieved by Coillte. However, the Irish Timber Growers Association now runs a database of prices achieved by the private sector on its website and this helps to provide a more complete picture of the timber market.
After a century of growing commercial species here and in Britain, comprehensive yield models are available and foresters can predict quite accurately the volumes and categories of timber that a given plantation is capable of producing.
NPV ignores past income and expenditure and as these are of no relevance to a future owner, it reflects perhaps most accurately the value to a potential purchaser. The method's principal purpose is to value the growing crop, though the convention is to include the value of the underlying land as notional income at the end of the rotation, and to account for the cost of replanting.
While NPV has been around since the 1600s and is the most widely adopted method, there is still no standardised approach to forest valuation.
Forestry consultant Henry Phillips has started a working group to develop a national code of practice for the valuation of forests.
The intention is that the code will be recognised by both the Society of Chartered Surveyors Ireland and the Society of Irish Foresters as the protocol to be adopted by valuation professionals.
William Merivale is national secretary of PEFC Ireland and a forestry consultant based in Cork. Email: firstname.lastname@example.org