1. Estimating the value of forest land by using the direct approach
Elina Mäki-Simola, 26 October 2016
Based on the Final report: ”National balance sheets for non-financial assets in Finland” (Grant agreement number – )

2. Background
During 2012–2014, a joint task force of OECD and Eurostat evaluated different methods for land valuation
A grant project of Statistics Finland for the implementation of the ESA 2010 in Finnish National Accounts
The report: ”National balance sheets for non-financial assets in Finland”
Contact persons: Ville Haltia, Statistics Finland and Risto Peltola, National Land Survey of Finland

3. Valuation of forestry land in Finland (1)
In general, for the land valuation (AN.211 Land), information from land use statistics and statistics on real estate transactions are used
Problem for forestry land: using data on real estate transactions to value forestry land leads to overestimation for the land value, as transactions always include the value of standing timber
How to separate the value of ”clean” forestry land and the value of standing timber?

4. Valuation of forestry land in Finland (2)
The residual approach:
The volume of standing timber (from the NFI) and the stumpage price data  the value of standing timber
The value of underlying land can be obtained by deducting the value of timber from the combined value
The residual method often leads to negative values because
The combined value, which is based on real estate transactions, may be an underestimate
Uncertainty for the most recent years’ NFI data on timber volumes as inventory is not conducted annually

5. Valuation of forestry land in Finland (3)
In addition: the variance in marketed timber prices reflects in the land value, which is not a reasonable result
The value of clean forestry land should develop smoother and reflect more the productivity of the land than the cyclical changes in timber prices
Therefore, some modifications are needed  the ”direct method”

6. The value of forestry land estimated with the residual method

7. The direct method for forestry land value (1)
The most common method to evaluate the value of a real estate for trade is so called summation approach
The total value is the sum of the components: the value of bare forest land, the value of standing timber and expectation values for young growing stands
In Finland, Forestry Development Centre Tapio produces data tables with unit prices for different forest land types (without timber) by 13 districts
The price formation process considers different types of soil and other factors that affect the value

8. The direct method for forestry land value (2)
Natural Resources Institute Finland produces area information on site fertility classes on mineral soils and on mires on forest land
Applying the information on unit prices and land areas the total value for the bare forest land can be calculated

9. The direct method for forestry land value (3)
The conclusion of the report was that the value of forestry land by the direct method is less volatile than the value obtained by the residual approach because it is based on estimated productive value of forest land types
 The direct method based on forest productivity was chosen to evaluate the value of forestry land.

10. Comparative results for forestry land value

11. The direct method in brief (1)

12. The direct method in brief (2)
Data on land areas, divided into several land-use sub-classes available at National Land Surveys databases (land use, land cover, soil)
The unit price for each land use type is derived from the statistics of real estatate transactions