I can't decide if I prefer the notion of using sprites, voxels or low-poly 3D models. The original Daggerfall already has a strange mix of the two (wheelbarrows are 3D, but barrels of all things, the classic RPG clutter items, are sprites with no collision at all?).
One deviation I'd love to see from the original Daggerfall is in actual dense forests - and low poly 3D trees would certainly work best there. An example of what I have in mind can be seen in the trees from Hexen II (which may be brush-based, I don't know).
:3 I can basically quote that and say we are "on the same boat", the trees in Hexen is what I thought of as well, though in Daggerfall they need to be meshed to each sprite of course.
And certainly for a game like Daggerfall (this may be nostalgia more than anything), I've always found a certain charm in how flat and abstract everything is. Only the necessary details for conveying the nature of a place are used, without being tastelessly meticulous in decals and other superfluous "visual noise" modern games rely on. These old games are so moody and surreal feeling, in how they do not strive for any idealized representation of anything.
Yes, the simplicity leaves so much for the mind. Striving for realism (and freedom for that matter ) in games leaves a larger desire for even more realism (and freedom), it is never enough.
The only issue is that, and I imagine this is why all the original sprites in the game lacked collision as well - Bethesda didn't want any randomly generated trees or lampposts blocking off buildings or anything like that. Seeing as Lucius said he wanted to add roads to the wilderness though, the new terrain generator could simply place little/no trees along them.
This should not be a problem, speaking from some experience with the combination of randomly generated content and passages & roads (programming). I like to think simple boundary/distance/position checks should be sufficient. Several ways to accomplish this should be available. And if anything will be generated in real-time, avoiding lag/spikes could be a matter of easing out the amount of loaded content over time, outside view-range for no visible fade-ins/pop-ups.