Companies with foreign capital purchased 44% less Latvian forest and agricultural land last year than in 2022

This is concluded from data by real estate agency Latio and the portal Cenu banka. Specifically, 57,588 hectares of land were sold in transactions involving legal entities in 2023, representing a 22% drop compared to 2022. The total value of registered transactions was 254 million euros. The most active regions for transactions involving forest areas and agricultural land were observed in the east of the country – Latgale and Vidzeme. Almost a third of transactions were concluded in Latgale, while 27% were in Vidzeme. In the other regions – Kurzeme, Zemgale, as well as the Riga region – there was an average of 15% of transactions in each of the mentioned territories. Latio concludes that large investors with foreign capital are buying fewer forests and selling more. Given the slower market pace in forest and agricultural land transactions in the second half of last year, the activity of foreign investors has decreased. Compared to 2022, 44% less forest and agricultural land was purchased with foreign capital last year. It is emphasised that investor interest has not stopped; rather, there is a more careful search for better deals in the market. Data shows that foreign investors sold 38% more forest properties last year than the year before, which is 17% of all areas sold in 2023. Furthermore, it is stressed that market trends in the forest property segment are determined mainly by large investors.

Largest transaction sum – in Ogres novads

In terms of value, the largest transaction, exceeding five million euros, was recorded last year in Ogres novads, where a company with German capital purchased agricultural land, as well as scrubland and forest with a total area of 754 ha. The second largest transaction via Latio auctions was concluded last spring for a total transaction sum of 4.06 million euros, with the buyer acquiring 35 land units in Kurzeme and Zemgale with a total area of 505 ha. The deal stood out with a case less characteristic of the forestry industry – properties were bought from a company with Finnish capital by a local forest management and logging company. Meanwhile, the largest area within a single transaction in the whole of Latvia was bought from another Latvian logging company by an international investment fund for a total transaction sum of 3.8 million euros. “Last year showed that forests and agricultural land remain a significant part of the Latvian real estate market, the growth of which is determined to a greater extent than in other market segments by the vision of foreign investors,” says Latio Forest Sales Department Manager Jānis Vēbers. He emphasises that selling large, geographically fragmented land properties in a changing market environment is time-consuming and legally and procedurally complex. “An essential aspect is determining the reliable market value of the property, which increases investor confidence. Such transactions require specific knowledge of the particular industry, and the precise value of the property is determined using a special methodology that is specific only to the forest and agricultural land segment,” says J. Vēbers.

Land is not being created any more

“All over the world, the money machine is working, there are more people on planet Earth, but the land on which to grow forests or food is not increasing, so its prices will only continue to rise,” says Modris Fokerots, one of the largest private forest owners, commenting on the overall situation. He points out that, in essence, the money emitted globally is becoming less valuable, because since 2020, even due to general inflation, the prices of forest land and all other land should have increased by at least 20% annually. “Thus, the price of forest land this year should have been at least half as high as it was in 2020,” concludes M. Fokerots. In his opinion, the increase in land prices is inevitable. “Try buying land, for example, in Germany, England, or Sweden, where even in films the plot revolves around one theme – two neighbours fighting over the acquisition of the same meadow, a kind of ‘Mērnieku laiki’,” M. Fokerots points out when asked to give an example of the struggle for land. He predicts that the same situation is slowly forming in Latvia. “Namely, those who had land, including forest land, with the forest ‘fall into their lap from the sky’, have already managed to realise this gift, whereas those who are proper owners are by no means in a hurry to sell the ‘goose that lays the golden eggs’,” explains M. Fokerots, justifying his statement – the value of the forest increases every year, and the owner feels these gains.

Land more valuable than gold

“Forest, forest land, agricultural land was, is, and will be more valuable than money deposited in a bank or gold bars, which is why there has been and will always be great interest from foreigners in this most valuable asset of Latvia,” assesses the overall situation Māris Liopa, Chairman of the Land Use Committee of the Latvian Chamber of Commerce and Industry and Chairman of the Forest Certification Council of Latvia. He points out that the forestry industry and its base – forests – are a significant sphere of the Scandinavian and also Baltic economies, and ultimately, forest areas in Latvia, as well as in Estonia and Lithuania, are increasing because forest has grown on part of the land previously used for agriculture. “Forest lands in Latvia were and remain one of the magnets that attract both foreign and domestic investors, especially if their prices compared to Scandinavian countries are significantly lower, but they will gradually, slowly even out,” assesses M. Liopa. In his view, the fall in forest and forest land prices observed last year is based on a decrease in demand for wood products, which accordingly caused a price drop.

“If you look at the ‘cosmic’ wood prices in the second half of 2022, it is logical that in the corresponding period in 2023, they experienced a significant drop; however, this rollercoaster must be perceived as a temporary process – a peculiar flash that changed the order of things at that moment but soon returned to its usual tracks,” M. Liopa replies to the question about the rapid changes in wood prices. In his view, in a situation where a deciduous forest grows in at least 50 years, a one or two-year period is a very small unit of time. One must take into account that for a forest intended for timber extraction, the main value-influencing factor is the income expected in the future. This depends on the age of the forest stand, the tree species and stock, quality, existence of management restrictions, distance to the storage area and place of consumption, quality of roads, and other factors. Great importance is given to the legislation, which differs in each country and provides for when and in what volume a forest owner may carry out economic activity. It should be noted that, for example, a forest owner in Sweden and Finland can harvest their forest when they consider it most economically advantageous. In Latvia, however, this can be done if the tree diameter has reached that stipulated in regulatory acts or the forest stand has reached the felling age set in legal acts.

Buyer's or seller's market

“Even though wood prices in 2023 were no longer as they were in the autumn of 2022, when both wood and forest property prices were very high, investor interest in purchasing such assets has by no means diminished, although some potential sellers are not yet ready to retreat from the price level experienced in 2022, and some potential buyers are by no means ready to buy at high prices and therefore are simply waiting for prices to descend from the heights of the heavens,” M. Liopa analyses the situation. He reminds of the times when a pronounced seller's market dominated, with them largely dictating the rules of the game because there was great demand from various categories of buyers, including long-term investment funds.

“Of course, currently there is no situation where buyers dictate their conditions to forest land sellers, but there is a tendency for these scales to even out,” M. Liopa replies to the question about when the time of a pronounced buyer's market was. In his opinion, the current moment can be considered a time of change of sorts. “Many potential sellers of forest land are currently not ready to sell their property for the price that potential buyers are willing to pay,” says M. Liopa. He reminds that land and property prices in Latvia are still lower than in Finland, Sweden, and even Estonia, so the interest of investors from these and other countries in the further purchase of forest property is logical.

Giant transactions

It should be recalled that the year 2018 will remain in history with several high-profile transactions – the forest owner group Sodra, by acquiring shares of SIA Bergvik Skog (owning 111,100 ha) for 324 million euros, became the largest private landowner (more than 124,000 ha). Many were surprised by the unprecedentedly high price of one hectare of land in Latvia, but at the same time, it is acknowledged that it shows the true value of the growing green gold.

It is significant that in July 2019, 100% of the capital shares of the second-largest private forest manager SIA Foran Real Estate (owning 54,207 ha) were acquired by Ikea subsidiary IRI Investments B.V., becoming one of the largest landowners in Latvia.

“In the largest forest property transaction in Latvian history, the price per hectare significantly exceeded its initially calculated level; therefore, foreign investors – buyers – see the future return level of the forest as much higher than it was estimated here in Latvia,” M. Liopa points out regarding investors' readiness to pay a high price. He believes that in terms of the mentioned transactions, the Latvian state should have acted more actively. “Almost five years have passed since the mentioned events, but in connection with the purchase of forest lands, nothing has changed significantly in Latvian state policy,” M. Liopa is critical. In his opinion, there will be greater interest in forests used for economic activity, but not in plots and properties where management restrictions would be set or where it would be prohibited.

Buyers want cheaper

“Buyers who want to buy forests and forest land are all around, but their desire is to buy it all for a pittance,” points out M. Fokerots. In his opinion, the recession has an impact on the buyers' position, as a result of which demand and also the prices of wood products have decreased. “Previously, cases were observed where a buyer, upon purchasing forest land with a forest at felling age, would harvest it and realise the roundwood at a super-high price, basically even making a profit, because the acquisition costs were lower than the realised price of the obtained roundwood,” says M. Fokerots. In his view, another important aspect that lowered forest land prices for a while last year is the increased loan interest rates, which are based on the inflation-curbing measure of the European and other central banks, increasing loan interest rates and thus causing a decrease in consumption.

“Of course, the price of forest land depends on what is growing on that particular land, and when timber had crazy prices, then it is logical that the land on which they grow also had a crazy price in our understanding, which, however, compared to other countries, is by no means as crazy as it seemed to us ourselves,” explains M. Fokerots. As an illustrative example, he shows that in a situation of crazy wood prices, one could earn 3000 euros per year from one hectare of forest land, but at the current price level – only 1800 euros per year, which over a 10-year period is 30,000 euros or 18,000 euros respectively. “Speculative transactions have been and will be, but their scale can no longer be what it could have been 10 or even 20 years ago, when there was a lot of land that the then owners wanted to sell, but there were relatively few who wanted to acquire it. Today, the situation is already different, and land value is understood much better and by many more people than at the turn of the century,” points out M. Fokerots. In his opinion, the land market in Latvia is by no means large, because the number of owners who would want to sell their land is by no means large. “Land is an essential resource on which you can grow anything – potatoes, carrots, grain, trees,” emphasises M. Fokerots.

Price depends on possibilities

The surveyed forest owners believe that forest property prices are based on one factor – what you are allowed to do with a specific property. In Latvia, natural values (habitats) are found in forests, and this means that they have been managed sustainably – economically justified, environmentally friendly. “There was, is, and will be a risk that, in perspective, it will not be possible to carry out economic activity in a specifically purchased property, or it will be limited, so a portion of those potential buyers who could purchase forest land are in a waiting position, because they want to know specifically which territories will be declared outside economic circulation. There is no doubt that there will be such, the question is only how many hectares and in what place in Latvia,” M. Liopa explains the situation with potential restrictions on economic activity and their impact on transactions. Interestingly, several of the surveyed forest owners mention as the most significant risk the desire of specific influential interest groups to increase the areas of protected territories, which are thus taken out of economic circulation, moreover, without appropriate compensation.

Forests – a CO₂ bank

According to several interviewees, it can be concluded that there are significant nuances in forest land transactions, because it is one situation when lands where the forest has been harvested and where new stands will have to be planted and tended are sold (bought), and completely different if forest land with a mature forest is sold. “Of course, the purchase of forest land and also the growing of a forest is not only and exclusively with the goal of being able to sell the wood grown in it, but also to generate income with CO₂ (bank) sequestration, participating in the carbon market in the future,” points out M. Liopa. He admits that participation in carbon trading in the future could be one more of the main motivators for forest land purchases, because in Latvia there is a risk that, in perspective, timber extraction will not be possible in a part of the forests.