Recently a group of forest and economic researchers analyzed investment potentials of almost all private forests at national level in the Republic of Croatia. The financial analyses showed which forest types have positive investment potential and under which conditions. Continue reading…

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Forestland in Croatia

According to the Constitution and Forest Law, the purchase of state-owned forests is not possible, at least for now. That’s why researchers analyzed investment potentials of almost all private forests at the national level.

The idea behind this research initiative is the fact that in the Republic of Croatia forest lands can provide positive net cash flows to satisfy rational (risk-averse) investors. Accordingly, the research objective has been to explore conditions and possibilities of generating an internal rate of return exceeding the cost of capital in forestry.

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This study could steer capital investing to Croatia and by that contribute to direct and indirect rural development. Investments can affect the region economy by the involvement of its labour force and other material inputs. Also, the transfer of good investment experiences from Croatia to the neighbour countries could be expected.

A concept

From the potential investor’s point of view this research provides a comprehensive investment analysis of 268,072 ha of forest land (7 forest types). It covers the period from 2018 to 2048 and includes forest purchase costs, management simulation, timber transport to mills, timber processing and veneer production, and finally the selling of sawmill, veneer and forest products.

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Research assumes the use of external (contractor) services from the domestic labour market for all phases of forest management, road maintenance, timber transport to plant and processing.

Data from the Croatian National Forest Inventory and forest habitats map were used as a basis for analyses. Spatial data on private forests, roads and timber process plants at the national level were also integrated into the analyses. For the forest management simulation, the MOSES 3.0 simulator was used, and the QGis 3.4 software was used for spatial analyses of forests, roads and mils.

Cost of capital (discount rate) estimation

Estimation of project discount rates is done within a pure financial framework: the risk-return setting as defined by the Modern Portfolio Theory. By using the data from world stock exchanges that list stocks of companies of the forestry sector (Table below), the discount rate was estimated as a reflection of the sector systematic risk level, perceived by rational (risk-averse) investors. Thus, the risk-adjusted discount rate is a result of the Croatian real risk-free interest rate and the stock market (equity) risk premium, and the developed-world Beta coefficient for the forest sector. The level of systematic risk that investors take should be compensated with a return of 8% (in real terms).

Suggestion for investing

The financial analysis of private forest categories in Croatia (each property size is 100 ha).

The financial analyses showed which forest types have positive investment potential and under which conditions. Results pointed out that multi-aged European beech forests have the highest internal rate of return (8.45%) and are the only one which would meet the expectations of a financially rational investor using criteria of a risk-adjusted inflation-free discount rate of 8%.

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Other forests types could be perceived as financially efficient investments, but only if lower discount rates are used as a consequence of lower costs of capital, or investors have interest in social goals like rural development which will lower the discount rate.

Source: Beljan, K., Čavlović, J., Ištvanić, J. et al. Investment Potential of Private Forests in Croatia. Small-scale Forestry 19, 19–38 (2020).
Main photo: pexels.com 

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Karlo Beljan is Assistant Professor of forest resource economics at the University of Zagreb (Croatia). He is a forestry professional, specialising in economics and forest management planning. A special topic of interest is capital investing in natural forests, characteristics of long-term investing, and financial risks in forestry businesses. He has co-authored 14 journal papers and over 10 presentations on timberland investments and environmental economics. In his career so far as a guest teacher spent 4 months and Czech University of Life Sciences (Prague).