Germany is a safe haven for investment with overcrowded core markets. Faced with rising prices, more and more investors are seeking alternatives. The forest real estate market in Germany is one such example. One third of Germany is wooded, equating to an area of some 11.4m hectares. Developments in recent decades speak for themselves, with the tree stock recovering since the Second World War to more than 90bn trees and forest area increasing by around 0.4%. “This has increasingly brought forest properties and woodland areas into focus for investors,” says Michael Weiß, Consultant in Forest & Agricultural Investment for Savills.
Forest values on the rise
While investors have previously been cautious to invest in the forest real estate market, current activity in the sector is significant. The transaction volume for forest property stood at around EUR 460m in 2016 with 34,730 hectares changing hands. Bavaria is the frontrunner in forest property deals accounting for 30% of transactions, while Schleswig-Holstein is the backmarker with 1%. Prices in Germany averaged EUR 1.32 per square metre in 2016. Looking back, it is evident that prices were previously much lower. In 2015, prices stood at just EUR 1.21 per square metre. This represents an increase in prices of 9.31% per hectare and the trend is continuing to rise.
Factors affecting value
Price levels are dependent on a number of factors. Location, for instance, has a decisive impact on value per square metre. Prices per square metre in Baden-Württemberg, Hesse and Bavaria are almost twice as high as those in the eastern federal states. Forests close to major German cities with more than 600,000 inhabitants show even higher price levels, with an average cost per square metre of approximately five euros. “Size is another key factor,” says Michael Weiß. “Investors normally pay higher prices per square metre for larger forest properties than for smaller ones. This is explained by the fact that the level of efficiency in forestry depends significantly on the size of the property. Consequently, income from forestry activities such as timber sales can only be generated beyond a certain size.” Finally, the quality of the habitat also plays an essential role. Both the tree and wildlife stock create value and, hence, determine the price per square metre.
An investment with deep roots
Forest real estate is ideal as a lucrative capital investment since income from hunting, fishing and timber sales can be accurately estimated by investors and forest properties inherently retain stable values. Investment in forest real estate also makes sense for portfolio diversification. The sector's clear distinction from other asset classes allows investors to balance risk since, even if equity prices fall, the value of green investments remains almost stable. The current average yields of 1-1.5% are expected to rise further over the coming years. Decisive drivers of this growth include the continued increase in demand for timber as a raw material as well as reorganisation into more stable holdings. In addition to value stability and constantly achievable income, these factors provide further incentives for institutional investors. It is for these very reasons that forest real estate has recently become a significant market segment in other countries. In the Scandinavian countries, institutional investors regularly deal in large forest properties.
“The consolidation of smaller woodland areas enables more efficient forestry and produces greater potential for income growth and capital growth,” adds Dr. Frank Urfer, Director and Head of Forest & Agricultural Investment for Savills. “Resolving the fragmentation and lack of transparency could smooth the path for institutional investors. Going forward, this can be achieved, among other means, via an increase in the number of inheritances and consequent disposals.”