Investors take ‘thinking green’ to new heights

Investors are taking ‘thinking green’ to new heights. As competition intensifies for core assets, some investors are turning their eye to leafy new opportunities, namely German forests.

One third of Germany is wooded, equating to an area of around 11.4m hectares, with tree stock growing to more than 90b trees since the Second World War, according to Savills. Now, forests are garnering interest because the forecast in demand for wood is sustainable and steadily rising, Michael Weiß, a consultant in forestry and agriculture at Savills, told REFIRE.

‘The current income is low, but sustainable and constant,’ he said. ‘The increase in the value of the land is also sustainable. Investments in forestry are, therefore, suitable not only for secure capital investment but also for safeguarding family assets over generations.’

Around €460m of forest sites were sold in 2016, according to Savills, representing 34,730 hectares. Bavaria accounted for the lion’s share, at 30% of total sales, with Schleswig-Holstein holding up the rear, with just 1%. (Figures for 2017 and 2018 will not be published until the end of 2019).

Prices are also on the rise and likely to continue to climb, according to Savills. Average prices in Germany stood at €1.32 per sqm in 2016, up from €1.21 per sqm in 2015, thereby representing an increase of 9.31% per hectare.

However, there are sizeable price variations nationwide. For example, prices per sqm in Baden-Württemberg, Hesse and Bavaria are double those in East Germany. In addition, forests cloze to cities with at least 600,000 inhabitants fetch an even higher price, at around €5 per sqm. ‘Investors typically spend more per sqm on big forests than on their smaller counterparts,’ said Weiß. ‘The main reason for this is strong demand for large, easily managed forest areas.’

However, forest sales in Germany are very limited. The longer the forest remains under family ownership, the less likely it is to be sold, partly due to emotional ties to it, according to Weiß.

Germany municipalities own around 52% of forests in the country. The remaining 48%, or just under 5.5m hectares, is privately owned, including churches with forest land comprising around 150,000 hectares, according to Savills. Around half of private forests consist of small areas of up to 20 hectares. Only 13% of private forest space is in excess of 1,000 hectares and the average private forest is only three hectares in size. Typically, such spaces are sold either by heirs who no longer have any connection to the area, or by those who acquired them as a pure financial play, particularly in East Germany.

‘Within the next few years, East Germany will be particularly attractive due to the increasing availability of large and connected forestry areas,’ Weiß said. ‘Since the market will adapt in the long term, lucrative sites can be acquired there.’

And investor interest is expected to increase going forward: ‘We are registering an increase in the number of investors from outside the industry, especially from the real estate sector,’ said Weiß. ‘Furthermore, more and more financial investors are looking for long-term assets that are managed in an ecologically sustainable manner. That makes forests ideal. They are particularly attractive for investors due to their value retention. This means that enthusiastic prices will continue to be paid for them.’

Forests can be a lucrative capital investment, according to Savills, because income from hunting, fishing and timber sales can be accurately estimated by investors and forest properties inherently retain their stable values. As a result, current average yields of 1% to 1.5% are expected to rise going forward, making forests more attractive to institutional investors. Germany is just playing catch-up: in Scandinavia, institutional investors have longed channelled capital into large forest deals.

‘The consolidation of smaller woodland areas enables more efficient forestry and produces greater potential for income growth and capital growth,’ said Dr. Frank Urfer, director and head of forest and agricultural investment at 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.’ (ssk)