Turbulent economic events tend to highlight the most stable industries which most successfully survive economic fluctuations. In the last two years, it can be seen that forestry is a stable value – it is an attractive industry both for the lenders and investors.

The total forest area in Latvia is 3.08 million hectares – thanks to the overall forest proportion in comparison to the total area, Latvia is very rich in forests. With the consistent wood prices increase, growing demand, and exporting potential, forestry businesses need increasingly more equity.

Most popular financing needs – felling, forest property, and equipment acquisition
Currently, the most common financing needs for the local forestry businesses are felling and forest property acquisition. However, alternative financing providers have an advantage for these financing purposes due to a higher speed and flexible conditions. In other words, the first buyer who has the necessary funds is the one who will purchase the particular felling or property. Usually, the loan amount for felling or forest purchase is up to EUR 100,000 and it is issued without any additional collateral. Nevertheless, entrepreneurs often provide the existing forest properties as collateral in order to improve the financing conditions.

With the increase in the number of felling purchases, the demand for processing and transportation services grows as well. This spring the demand for equipment was significantly larger than last year. Usually, forestry businesses purchase forwarders or harvesters with a value between EUR 50,000 and EUR 100,000. Depending on the equipment price and specifics, it can be financed both as a loan or leasing.

Transportation costs as a delaying factor for export growth
As a result of the disbalance between goods for sale and containers, in 2020 we observed a rapid sea container price increase of up to 3 times in comparison to 2019. The companies who exported to distant destinations, including logging businesses, especially suffered from these changes. Even though the transportation price increase was momentous, agreeing on a new price for wood with the clients in Asia and other continents required more time. In addition, there were situations where a compromise that would fully compensate for the increased transportation expenses could not be reached. The combination of these circumstances altered the net profit margins of the exporting companies and often caused a need for additional working capital financing. Exporting companies were also motivated to seek other buyers and closer exporting destinations.

Construction trends – positive indications for long-term growth for the forestry industry
According to the data gathered by “BCC Research”, the global wooden frame house manufacturing market grows by 6.7% on a yearly basis. Wood has proven to be sustainable and durable material for constructing industrial and residential buildings. Learning about wood processing and protection technologies also contributes to the trend of using wood for construction. In accordance with the data of “Luminor” bank, the financing provided in 2020 and 2021 for wooden building construction reached 45% of the total financing issued for construction purposes. The change in construction trends increases the demand for wooden materials and corrects their price. Thanks to the cooperation with numerous wooden house manufacturers, “Capitalia” as a financier has also experienced the growing dynamics in this manufacturing segment. “Capitalia” has provided working capital financing both for the manufacturers and for the developers of the wooden buildings.

Forest as a secure and profitable long-term investment
Unlike other types of investment, the amount of wood in the forest naturally increases by 3-5% annually without any owner’s input. While part of forest owners rush to sell fellings and properties when wood prices rise, others purchase forest properties and glades as investment objects. It is a known fact that the developed forest areas tend to be purchased by Scandinavian and local funds, which provide long-term forest management. In addition, the market consolidation and the formation of property “packages” increase the sales price in the future. It is expected that the rapid decrease in wood imports from Russia and Belarus will cause a price increase for local resources and properties. Therefore, in order to promote the capital access to the local investors, “Capitalia” has also started issuing loans with forest property collateral. With such an action, “Capitalia” wants to concentrate this valuable natural resource in the hands of the local investors.