Studies on tree communities have demonstrated that species diversity can enhance forest productivity, but the driving mechanisms at the local neighbourhood level remain poorly understood. Here, we use data from a large-scale biodiversity experiment with 24 subtropical tree species to show that neighbourhood tree species richness generally promotes individual tree productivity. We found that the underlying mechanisms depend on a focal tree's functional traits: For species with a conservative resource-use strategy diversity effects were brought about by facilitation, and for species with acquisitive traits by competitive reduction. Moreover, positive diversity effects were strongest under low competition intensity (quantified as the total basal area of neighbours) for acquisitive species, and under high competition intensity for conservative species. Our findings demonstrate that net biodiversity effects in tree communities can vary over small spatial scales, emphasising the need to consider variation in local neighbourhood interactions to better understand effects at the community level.