The Swedish Stand Method as an Income

Capitalization Approach in Forest Property Valuation

Baltic Valuation Conference 2013Reykjavik, Iceland

19-20 September 2013

Gunnar RutegårdLantmäteriet - the Swedish mapping, cadastral and land

registration authority

Non-industrial forest ownership in Sweden

• 22.5 million hectares of productive forest land (55 % of Sweden´s total land area)

• About 328,000 non-industrial private owners own 50 % of the forest area, divided into 238,000 management units

Private forest ownership

• Most common way to acquire a forest property is as gift or

purchase within a family or by inheritance

• The number of representative, market based purchase can be

estimated at be about 1,000 – 1,500 transactions per year

• Reasons for the need for valuation of forest properties

(compare with Finland), e.g.: Acquisitions in the open market

When forest areas, due to their natural (biological) values, are taken over

or when restrictions are imposed on forest management by the State

In conjunction with a transfer within the family

In dissolution of co-ownership

When forest is to be taken as security for a loan

Some characteristics of Swedish forestry properties

• The financial value of forest is primarily based on the

income from timber production

• The long time that must elapse before the forest is ready

for harvesting

• The annual felling volumes can vary greatly between

years => the smaller a forest property, the greater is the

likelihood that age class distribution is not evenly spread

which also affect revenues

The market situation for forest properties

• Until the latter part of the 1980s, the market was

very much regulated; active farmers were given

priority to the nearby forest - a price review was

done in order to avoid prices exceeding the

estimated long-term rate of return

• About 1990 there was a liberalization of the

institutional framework; forest properties could be

sold on market terms => Increased supply of

forest properties

Gross value and net conversion value of annual felling, and prices for forestland, 1970-2012, in real values at 2012 prices

0

100

200

300

400

500

600

Gross value

Net con-version valuePrices for forestland

Year

SE

K p

er

m3

Probable reasons behind this trend reversal

• Many buyers are prepared to pay handsomely for so-called

non-monetary components, e.g. sentimental motives attachment to the geographical area right of control pride of ownership

• Buyers do not have the same requirements as previously

concerning a high yield from the property in order to handle

their finances

• Lower interest rates at the time of joining the EU (1995)

• Long-term return from the forest to balance risks on the

stock market

• The tax reform 1992

The Stand Method

• Was introduced in 1989

• Is the predominant method for valuation of forest

properties in Sweden

• Lantmäteriet has the responsibility for the

maintenance of the method

• Has about 200 users in Sweden – the largest

category of users is to be found within the Swedish

Forest Agency but some of the users are also small,

private businesses (consultants)

The Stand Method

• Is based on the classical approach of income

simulation of market value

• Handles each stand separately – the stand is

extrapolated, based on the field conditions

estimated by the valuator

• Inventory data includes: area, distance from road for timber extraction (logging), site

quality, age, maturity class, species composition, volume of

growing (standing) forest and planned silvicultural measures

• Activities such as thinning, final cutting and

silvicultural measures are simulated and

extrapolated from the time of valuation to the final

felling

The Stand Method

• Revenues and costs are discounted to the present

day, according to the applied discount factor

• At the end of the first rotation period, a forecast is

made for an ideal production for an additional

rotation period

• This ideal production is repeated an infinite number

of times

• The final net present value is represented by the

value of the current rotation period plus all future

rotation periods

The Stand MethodAn example of the principle

The bars symbolize the revenues and costs

The applied discount rate

• The user determines the discount rate that is to be applied,

which is very important for the final net present value

• Lantmäteriet publishes guidelines for the discount rate that

should generate a fair market value

• This recommended discount rate is an average for the

country and is estimated based on a number of fictive type

forest properties with varying conditions

• When the discount rate began to be used the recommended

interest rate was 4-5 per cent

• The recommended rate for the year 2013 is 2.5 per cent

• How could this successively falling discount rate be justified

from an investment perspective?

The applied discount rate

• The discount rate in the Stand Method: will be used as a part of the process to simulate the

market conditions

should reflect the average long-term relationship between

future timber yields and prices paid for the properties

can be seen as an average market-steered interest rate

designed to reflect the long-term benefits of timber yields

the rate used (determined) will thus take into account the

market´s perception of the value of forest stands of

different age

should not be treated as an ordinary hurdle rate applied in

a standard cost-benefit calculation

The use of the Stand Method as guidance for valuation of forest properties

• The recommended discount rate will only give some indication

=> the individual user of the method should find a more

precise level of interest rate that matches his/her field of

activity

• A method recommended is to start from a number of sales of

forestland, which occurred within the user´s field of activity,

over a limited, but current, time period

• The sold properties should have a forest plan with inventory

data => Input the inventory data into the Stand Method

program => Run an iterative adjustment of the discount rate

until the level that corresponds to the price at which the

property was sold for is found => The determined rate can be

used as an input for new valuations

Based on two valuation methods

• Is it correct to say that the Stand Method is based

on two separate valuation methods?

• It definitely uses the Income Capitalization

method, including market-related discounting

cash-flow

• To obtain a market value, the result of the I C

calculation may not be adequate if not in

accordance with the local market => the user´s

knowledge is very important in this context

Based on two valuation methods

• Adjust the discount rate - this adaptation of

the valuation to the market is a way of using

the Sales Comparison method

The Stand Method make use of both the

Income Capitalization method and the Sales

Comparison method