Trends in discount rates used for forest valuation in New Zealand

Abstract

Background: The discount rate is a key input for estimating the market value of a forest. Data collected in surveys of forest valuers from 1997 to 2017 indicate a reduction in implied discount rate (IDR) over time with lower IDRs for larger forests. The purpose of this study was to formally analyse these trends.

Methods: There are three steps to the analysis:
1. Relationships were developed for the IDR data from 1997 to 2017;
2. Further relationships were developed for IDR data from 2009 to 2017 for which forest size (i.e. net stocked area) rather than just size class is available; and
3. Detailed forest transaction data from 2011 to 2017 were used to develop a model to estimate average crop value from key variables including discount rate. This process allowed an analysis to confirm whether or not trends in discount rate with time and forest size were significant.

Results: Analysis of the implied discount rate (IDR) revealed that the reduction over time is significant and that the discount rate for large forests (>10,000 ha) has declined more than for smaller forests. Analysis of data from 2009, for which forest size rather than size class is available, showed that forest area has a significant effect on IDR. Finally, the discount rate within the crop-value model, developed using transaction data collected since 2011, was found to vary with time and forest size; i.e. discount rate decreased as time or forest size increased.

Conclusions: Overall, it can be concluded that the discount rates implicit in New Zealand forest transactions have declined over time, with the scale of the reduction depending on forest size.