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Forestry analyst values forests at $18b

Andrew Morton

Forestry deals in Australia and New Zealand over the past 20 years have totalled up to $18 billion, according to a leading forestry analyst. Managing director Indufor Asia-Pacific (Australia), Andrew Morton, said the value of 93 transactions in Australasia over the 20-year period was expected to be in the range of $12-$18 billion. Source: Philip Hopkins for Timberbiz

Mr Morton was speaking at a forest valuation conference held in Hobart last month by the Institute of Foresters of Australia.

Mr Morton said the deals represented about 3.3 million hectares of tree crops – about two-thirds softwood and one third hardwood.

The softwood tree crop values broadly ranged from $4500-$13,000 per hectare, whereas hardwoods broadly ranged from $2000-$6000 per hectare.

Mr Morton said value was usually arrived at by a willing buyer and seller forming an opinion about an asset. However, it was difficult to compare many forestry assets, to quantify their differences.

The forestry approach, he said, was to use an implied discount rate, with the parties involved calculating their expectations of the discount rate. The discount cash flow was an indication of risk.

Mr Morton said over the 20 years, the general view was that there had been some decline in the discount rates, with great variations. In 2011, for example, the discount rate on one transaction was as low as 6%, whereas in the same year, another party was happy to receive a 10% return.

Mr Morton said there was a difference between the current discount rate and the perpetual rate, or ongoing crop.

“You must be conscious of how the two play out,” he said.

A table displayed by Mr Morton showed that just after 2000, the perpetual discount rate on one deal was about 9% whereas the best performance was achieved by a current discount rate of more than 12% in 2010-11. From 2014, the current discount rates were higher than the perpetual rates.

Mr Morton said in Australia, with the exception of New South Wales, plantations were now mainly privately owned. Institutional investors dominated with about 50%, followed by farm foresters and other private owners.

Small amounts were held by timber industry companies and a few management investment schemes, while governments still held about 20% of the estate, mainly in NSW and Western Australia.

“Notable also is the recent re-establishment of forest and wood processing common ownership/management models,” he said.

Mr Morton said the flow of transactions had mainly been between timberland investors, less between governments.

“These transactions are done with high levels of insight regarding the description of the estates and understanding of the asset’s operating environment,” he said.

Summing up, Mr Morton said timberlands in Australia and NZ were still of great interest of investors. Transactions tended to be vigorously contested and vendors recognised the core attributes of the assets.

“Due diligence remains critical to providing buyers with precise insights into the assets. Transactions commonly involve very well-informed parties,” he said.

Mr Morton emphasised that governments had always played a big role in forestry, doing research and establishing plantations from late in the 19th Century. Policy frameworks would remain influential in policy areas such as carbon and water, fire issues and policies relating to threatened species.

“Medium term wood supply is also a key focus of the industry’s policy initiatives,” he said.