Savills World Research Germany

Spotlight The German forestry market July 2017

Summary Though fragmented and non-transparent, the forest real estate market is attractive

■ Forests account for the second ■ Owing to the fragmentation and lack that there are sound reasons for largest land use in Germany behind of transparency, the German forest real investing in forest property, the agriculture. Around a third of the estate market is difficult to enter for strongest of which is value stability. surface area of Germany is covered institutional investors. Against this background, the German with an estimated 90 billion trees. market promises significant growth ■ However, the importance of the potential. ■ Approximately half of this forest sector in other countries demonstrates is in private ownership. Large forest owners are very few in number and the majority are noble families.

■ The transaction market for forest “Forest real estate is not only for aficionados but is also of property is also very fragmented. interest to long-term institutional investors. Scarcely any On average, only approximately two hectares change hands per transaction other asset class is likely to combine such high value stability for €15,000. The annual transaction with regular income.” Dr. Frank Urfer, Investment Germany volume totals little more than €300m.

savills.de/research 01 Spotlight | The German forestry market July 2017

Facts to the german forest and ownership structure

area, or 5.5 million hectares, is in German forests – a few Who owns the forest? private ownership, with churches facts The ownership structure owning a forest stock of around In Germany, the forest is not only an of forest real estate 150,000 hectares (see Graph 2). Half important cultural asset (the “Battle of Today's forest ownership structure of private forests cover very small the Teutoburg Forest” and the “German is heavily fragmented. There are areas of up to 20 hectares. Only 13% oak”) but remains a defining element around 2 million owners in total. The of private forest area is attributable of the landscape to this day. More Free State of Bavaria is the largest to large private forests of more than than 11 million hectares are covered forest owner in Germany with almost 1,000 hectares. The average private with forest, representing almost one 780,000 hectares. Together, the State forest covers just 3 hectares, which is third of the surface area of Germany. and federal states own a third of all several times smaller than state-owned Only agricultural land occupies more forest area. Almost a fifth of forest area and corporate forests. The largest space, accounting for 52% of the is comprised of corporate forests, private owner is non-profit organisation country. The federal states of Hesse which are principally owned by local DBU Naturerbe GmbH, a subsidiary and Rhineland-Palatinate are the most authorities. Nearly half (48%) of forest of the German Federal Environmental densely forested with 42% of surface area, while Baden-Württemberg and GRAPH 1 Bavaria have the largest forest areas Share of forest area in Germany on county level Hesse and with 1.4 million hectares and 2.6 million hectares respectively (see Graph 1). In Rhineland-Palatinate are most densely forested the ten years from 2002 to 2012, forest area in Germany increased by 50,000 hectares or 0.4%.

The number of trees in German forests is estimated at around 90 billion. These trees comprise more than 50 tree species (groups), 11 of which account for a combined 90% of the total forest area. Almost three quarters of the forest area is occupied by four tree species, namely spruce (25%), pine (22%), beech (15%) and oak (10%). Coniferous trees account for slightly more forest area than deciduous trees with a proportion of 55%. Without human intervention, 75% of today's forest area would be covered with beech and 17% with oak. In recent decades, forestry policy has been aimed at converting purely coniferous forests into more naturalistic deciduous and mixed deciduous forests. Consequently, the area covered by coniferous trees is in decline while deciduous forest area is expanding.

With an average age of 102 years, the oak is the oldest tree species in German forests today. The average age of a tree across all tree species is 77 years, with a quarter of all trees being older than 100 years. Following the extensive reforestation after World War II, the majority of the tree stock is between 40 and 60 years old. up to 15% up to 30% up to 45% more than 45%

Data source: BBSR, map source: BKG

savills.de/research 02 Spotlight | The German forestry market July 2017

Ownership structure and transaction market for forest real estate

Foundation (DBU), which claims to TABLE 1 own around 69,000 hectares of forest. Selected owners of private forest A lot of noble families own large Other owners of large private forests areas of forest in Germany are primarily found among noble families (see Table 1). The von Owner Area Hatzfeld-Wildenburg family and the DBU Naturerbe GmbH ca. 69,000 ha Prince of Hohenzollern Corporate Group each own 15,000 hectares of Haus von Thurn und Taxis < 20,000 ha forest. Larger, non-aristocratic private Family von Hatzfeld-Wildenburg ca. 15,000 ha owners include Constantia Forst Unternehmensgruppe Fürst von Hohenzollern ca. 15,000 ha (approx. 9,250 hectares) and Blauwald (approx. 8,500 hectares). The total Waldgesellschaft der Riedesel Freiherren zu Eisenbach GbR ca. 14,000 ha number of private owners with at least Wittgenstein-Berleburg’sche Rentkammer ca. 13,000 ha 100 hectares of forest is estimated at around 3,500. Most forests of this Wittelsbacher Ausgleichfonds ca. 12,000 ha size are likely to be professionally Unternehmensgruppe Fürst Wallerstein ca. 11,000 ha managed. However, all forest owners Constantia Forst GmbH ca. 9,250 ha in Germany are legally obliged to manage their forests “properly and Blauwald GmbH & Co. KG (Family Merckle) ca. 8,500 ha sustainably” (§11 of the Federal Forest Quelle: Savills Act (Bundeswaldgesetz)). Forestry still employs around 19,000 people in Germany at present. However, the TABLE 2 number of employees in the sector and Indicators of the transaction market for forest real estate in their proportion of overall employment have been in decline for decades. Germany Very fragmented, therefor little fluctuation Conversely, felling is running at a higher capacity today than 20 years 2007 2008 2009 2010 2011 2012 2013 2014 ago, with a current annual output of 5.5 million m³. Number of transactions 24,500 23,000 21,400 21,400 23,500 22,100 20,100 20,500

Area turnover The transaction market 45,200 42,400 40,300 38,800 37,700 43,400 42,100 40,400 for forest real estate (ha) Transaction volume Owing to the fragmented ownership 285 344 329 308 332 339 312 338 structure and pronounced (€m) confidentiality concerns of many Average price 6,300 8,100 8,200 7,900 8,800 7,800 7,400 8,400 larger forest owners, the forest real (€/ha) estate market is still significantly Volume per transaction 11,700 14,900 15,400 14,400 14,100 15,400 15,600 16,500 less transparent than other property (€) sectors. The only starting point for Area per transaction 1.9 1.8 1.9 1.8 1.6 2.0 2.1 2.0 appropriate figures are the valuation (ha) boards. Here too, however, forest Source: Task force of land valuation boards and superior land valuation baords Germany, Savills real estate is not always regarded as a separate property sector but is reported in combination with agricultural land. National figures are GRAPH 2 only compiled every two years by Ownership structure and distribution of private forest by size The the higher valuation boards, mostly German forest belongs to almost 2 million owners recently for the years 2013/14. Although these figures are also based upon incomplete data, they are likely > 20 ha 10% to provide a credible and realistic State forest > 50 ha reflection of the transaction market 33% 6% for forest real estate in Germany. > 100 ha 6% Between 2007 and 2014, the figures show around 22,000 transactions per Private forest > 200 ha 48% up to 20 ha 8% year, in which around 41,000 hectares 50% changed hands for approximately > 500 ha €320m. Hence, the average transaction 6% was for less than 2 hectares and totalled less than €15,000. All values > 1.000 ha remained highly stable during the Trust forest 13% Corporate forest 2% period in question and fluctuated by 19% only approximately 10% around their averages (see Table 2). Source: Bundeswaldinventur

savills.de/research 03 Spotlight | The German forestry market July 2017

Transaction market for forest real estate

Prices showed a greater degree of than those for smaller assets, for property varies strongly based upon fluctuation. The average price per instance, because larger forests can the nature, quality and age of its tree hectare paid across this entire period be managed more efficiently and stock. averaged just above €7,800. The private hunting grounds can only be lowest average price of approximately established from a minimum area of The average prices paid at federal €6,300 per hectare was recorded in 75 hectares. One exception to this is state level in 2014 underline that 2007 while the highest average of very small private forests, which often location alone produces significant approximately €8,800 per hectare attract connoisseur's prices. When it price differences. While the average was paid in 2011. However, data comes to location, the basic principle price level in Saxony-Anhalt stood gaps are just one reason why prices is that the higher the population at just €2,500 per hectare, the are not a meaningful indicator of density, the higher the price per corresponding figure in the most value trends for forest real estate. In hectare. The most expensive forests expensive state of Baden-Württemberg addition, practically nothing is known are typically found in the surrounding was higher by a factor of twelve (see about the composition of forest areas of major cities, where forest Table 3). Price levels in the new federal properties that changed hands in the management motives surely play a states created from the former East individual years with regard to their minor role in pricing. Finally, the tree Germany are generally significantly size, location or the quality of the tree stock is a crucial factor in determining lower than in the rest of the country. stock. However, all three of these the value of forest real estate, However, the forest properties that factors have a substantial impact on representing around 50% to 55% of change hands are significantly larger. the value of forest real estate. Prices overall values on average in Germany. The largest average size in 2014 for larger properties tend to be higher Consequently, the price of a forest was found in Brandenburg with

TABLE 3 Indices of the transaction market in the federal states in 2014 Baden-Wuerttemberg most expensive area state, highest area turnover in Brandenburg

Area turnover Transaction volume Average price Area per transaction Federal state (ha) (€m) (€/ha) ↓ (ha)

Bremen + Hamburg 7 0.3 42,900 n/s

Baden-Wuerttemberg 800 24.1 30,100 0.22

Bavaria 4,100 114.7 28,000 0.82

North Rhine-Westphalia 2,500 37.3 14,900 0.98

Schleswig-Holstein 300 4.4 14,700 0.83

Lower Saxony 2,300 27.9 12,100 1.46

Hesse 600 6.2 10,300 0.35

Saarland 200 1.8 9,000 0.47

Saxony 4,000 24.6 6,200 2.62

Rhineland-Palatinate 2,600 14.4 5,500 0.69

Brandenburg (incl. Berlin) 10,200 40.7 4,000 5.70

Mecklenburg Pomerania 4,300 15.9 3,700 2.98

Thuringia 5,300 17.5 3,300 2.76

Saxony-Anhalt 3,200 7.9 2,500 2.71

Source: Task force of land valuation boards and superior land valuation baords Germany

savills.de/research 04 Spotlight | The German forestry market July 2017

Transaction market for forest real estate and forest real estate as an investment

5.7 hectares while the lowest was have practically no impact on the market reports for some federal states recorded in Baden-Württemberg with value of forest real estate. In addition, show average prices paid for forest 0.22 hectares. worldwide forest area and hence properties. These have the advantage timber stocks have been in decline for over national price statistics that the The fact that forests in the new federal decades. This too supports the value federal state, which is evidently a states are relatively large (a legacy of forests, particularly since timber variable that strongly influences prices, of their East German past) may be a is not only a vital commodity but remains constant. A corresponding factor in the disproportionately high also stores CO2 and hence plays an time series for North Rhine-Westphalia transaction activity in these federal essential role in stabilising the global from 2007 to 2015 reveals that prices states. Just over 0.8% of the entire climate. actually scarcely fluctuate and show forest stock in the new federal states a slight upward trend over the period, changed hands in 2014, which was In view of the paucity of data, it with prices in the administrative almost five times the proportion is difficult to substantiate these districts increasing by 4.2% per year transacted in the old federal states. theoretical statements on the value (see Graph 4). Comparable price Owing to their larger area (combined stability of forest property with figures. statistics for Hesse from 1997 to 2012 with lower price levels), forests in the Once again, the valuation boards are show no noteworthy price movements new federal states are likely to be of the only starting point for robust data between 1997 and 2009. Prices interest to a wide circle of investors. and even they do not provide any time fluctuated within a range between However, the extent to which the series on value trends with regard to approximately €8,000 per hectare purchaser structure varies by region forest real estate. However, the land and €9,000 per hectare. Even at the cannot be assessed in view of the lack of data. What is certain is that, owing to the fragmented nature of GRAPH 3 forests, only a very small proportion of Price development of the Lumber Future at the stock exchange in the German forest real estate market appeals to institutional investors at Chicago + 250% price rally since 2009 present. Assuming that these investors 120 apply a minimum investment of €1m, they would only be interested in 100 forests larger than over 30 hectares even in the most expensive federal 80 state of Baden-Württemberg based /m³ upon average prices paid in 2014. € 60 In Saxony-Anhalt, the minimum size would be more than 400 hectares 40 according to the same calculations. A glance at the size structure of private 20 forests (see Graph 2) and the average size of forests sold illustrates how 0 small this market segment is.

Forest real estate as an investment Source: Thomson Reuters Nevertheless, there are sound reasons to invest in forest property not only for GRAPH 4 private investors and their investment managers but also for institutional Transaction volume and average price for forest real estate in investors. The most important among North Rhine-Westphalia Stabile uptrend on the price these is that investments in forest Transaction volume (left axis) Average price (only county, right axis) property hold their value very well. 70 14,000 This is attributable to the fact that the land accounts for around half of the 60 12,000 total value on average as well as to the stability and predictability of income. 50 10,000 The latter is principally generated 40 8,000 through selling timber, with additional m € /ha revenue coming from hunting and € 30 6,000 fishing. While timber, the main source of income, is itself subject to significant 20 4,000 price fluctuations (see Graph 3), only a small proportion of the tree stock 10 2,000 of a forest is felled each year (2% on average in Germany) and felling can be 0 0 omitted altogether where necessary. 2007 2008 2009 2010 2011 2012 2013 2014 2015 Consequently, these price fluctuations Source: Superior land valuation baord North Rhine-Westphalia

savills.de/research 05 Spotlight | The German forestry market July 2017

Forest real estate as an investment start of the millennium and following is being used for energy (2016: 18%). for use as a material will increase, the global financial and economic However, the majority of domestic thus supporting the price of timber. crisis, prices remained largely stable felled timber (more than 80%) is According to current projections, the in stark contrast to those in other processed for use as a material. This global population will continue to property sectors. From 2010, prices in industrial demand is closely correlated grow until at least 2100. This alone is Hesse also embarked on an upward with general economic growth, likely to ensure increasing demand for trend similar to that in North Rhine- meaning that the economy is has a timber, e.g. in the construction sector Westphalia. This indicates that forest substantial influence on the price of and furniture industry. Moreover, rising real estate is also benefiting from the timber (see Graph 5). The principal incomes and the associated higher per low interest rate policy of recent years customers include Germany's sawmills capita consumption will also increase and the associated flight to real assets. (more than 300) as well as paper and demand for timber. Domestic demand Both data series support the stability pulp producers (almost 200). Owing for timber as an energy source is also argument while also suggesting long- to the relatively expensive transport of likely to rise further over the coming term capital growth. raw timber, proximity to at least one years. Wood is enjoying something of of these customers is an important a renaissance as a fuel in Germany. Besides its value stability, forest location factor for forest property. Between 2006 and 2016, use of property also provides owners with domestic timber for energy purposes regular income from commercial Taking a long-term view, there is rose by 13%. Private households operations. Between 2006 and 2015, much to suggest that demand for were a key driver of this growth. The average net income from private timber both as an energy source and proportion of households primarily forests larger than 200 hectares stood at approximately €165 per hectare. Assuming an average value of €7,500 TABLE 4 per hectare for such forest property, Returns of private forestry from 200 ha forest area this equates to a running yield of 2.2% per year, with the range fluctuating Between 2% and 4% running yield per year between 1.3% and 3.6%. Almost 90% of this income comes from timber 2007 2008 2009 2010 2011 2012 2013 2014 2015 sales. Hunting and fishing play a minor role, accounting for less than 5% of Return* revenues, as does other income (see 586 428 346 400 443 449 430 445 435 Table 4). (€/ha WFA)

Thereof through Hence, the most important 91 83 79 84 84 85 84 86 87 determinant of income from forest wood (share in %) property is the price of timber. This, Net income* in turn, is determined by demand for 270 144 97 148 188 179 164 174 157 timber since the supply is a highly (€/ha WFA) stable variable. Only major storm Return on invest- events, such as Cyclone Kyrill in 3.6 1.9 1.3 2.0 2.5 2.4 2.2 2.3 2.1 2007, produce significant short- ment** (%) term increases in the timber supply. Source: BMEL / WFA = wooden floor area, * without benefits for third-party, sovereign + other functions, ** at 7,500 €/ha property value Demand can be essentially divided into two categories: demand for timber as a material (e.g. for the construction GRAPH 5 sector or the furniture and paper industries) and demand for timber as Development of price of timber in wholesale and gross domestic an energy source. In Germany, the two product in Germany Prices fluctuate with market cycle areas of demand are evenly balanced wholesale price raw and saw wood Gross domestic product since the use of timber for energy 10 purposes has increased significantly in recent years. The use of timber 8 as a proportion of overall energy 6 production has doubled over the last five years to around 4%. This growth 4 is politically desirable in the context 2 of energy transition and is likely to continue for some time, even though 0 the use of timber for energy is naturally limited owing to the scarcity of the -2 resource. Even today, by far the largest in % year last against change -4 proportion of timber consumption for energy purposes is covered by -6 imports although an increasingly large 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 proportion of timber felled in Germany Source: Federal Statistical Office

savills.de/research 06 Spotlight | The German forestry market July 2017

Outlook and strategic recommendations heating their homes with solid fuels such as wood increased from 5.1% “The heavily fragmented ownership structure and the to 6.3% between 2008 and 2013 (the associated lack of transparency are without doubt large latest data available). More than one in four households used wood for heating hurdles for investors in the current forest real estate market. at least occasionally. However, those who overcome these hurdles will land in an What all of this means for investors attractive property sector.” Matthias Pink, Research Germany in forest real estate is that they can reasonably expect income to at least remain at the level of recent years portfolio diversification. The fact that going forward. Achieving an average institutional investors have thus far annual income return within a range avoided Germany while at the same of 2-3% appears realistic. Then there time investing in other countries, such is capital growth on forests. Based as Scotland and Finland, is most likely upon the (little) available data, the attributable to the current fragmented last 10 years or so have produced nature of German forest property. annual capital growth of just over 4%. Capital values are likely to have Partially interlinked with this risen even more sharply over the last fragmentation is the lack of two to three years although no data transparency in the German forest is yet available to substantiate this real estate market. This, too, is an assertion. Even though capital growth impediment to institutional investors. may ease over the coming years with Since neither the fragmentation nor the interest rates likely to rise, total returns lack of transparency are irreversible, (income return plus capital growth) on it appears conceivable that the forest German forest real estate are expected real estate market will also undergo a to average at least 4%. Significantly certain degree of institutionalisation in higher returns can be achieved on Germany at least over the long term. efficiently managed large forests This would unlock significant potential outside of the highly priced regions. for consolidation since the merging of smaller forests into larger properties Outlook and strategic that allow efficient forest management recommendations would allow for both income growth A passion for hunting, proximity to and capital growth. Even today, larger nature and a desire for remoteness properties achieve higher average are among the many reasons for prices per hectare than smaller forests. private investors to acquire forests. Consequently, larger forests are Clearly, there is also brisk business in obviously more scarce than smaller this segment with more than 20,000 forests. In the event of increasing forest sales per year (see Table 2). interest from institutional investors in However, institutional investors remain German forests, this price discrepancy very scarce, at least when it comes would widen further. to German forests. In other countries, forests are an established property sector in which both private and institutional investors can participate via a range of vehicles. In the USA, where there is even an index for forest real estate (the NCREIF Timberland Property Index), investors include numerous pension funds. The reasons why these investors allocate a portion of their capital under management to forest property in the USA and elsewhere in the world equally apply to Germany. Such assets offer very high value stability since both the land and tree stock can act as good long-term stores of value. Unlike gold, which is similarly regarded as a store of value, forest real estate produces regular income. The low correlation with equities and other asset classes also makes forest property suitable for

savills.de/research 07 Spotlight | The German forest real estate market July 2017

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