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UK Forestry Returns On Fire
15 May 2013 by Andrew Shirley Posted in Farmland Market Commercial forests showed an average total return of just over 18% in 2012, according to the latest results from the IPD UK Forestry Index. Launched yesterday (14 May 2013), the latest instalment of the index, which has been running for 20 years, reveals that last year forestry comfortably outperformed most mainstream asset classes including equities (10.2%) and gilts (4.7%). On an annualised basis, forestry has delivered a return of 8.1% over the past two decades. This compares with 7.2% for equities and 7.7% for gilts. Many consider forestry to be a useful hedge for investment portfolios because of its limited correlation with more conventional asset classes. The three-year (23.9%), five-year (17.7%) and 10-year (16.3%) annualised returns appear to support this sentiment. Over the same periods, equities only managed to produce returns of 6.7%, 2.1% and 8.0%, respectively. Although this looks a strong performance, calculating the annual income return from the asset class is slightly more complicated, as IPD’s Mark Weedon explained to me and other slightly bemused launch attendees. Even though the value of timber sold last year accounted for 3.3% of the value of the 148 upland, mainly Sitka spruce, plantations – worth in total £221m and on average £2016/acre – tracked by the IPD Index, the calculated income return was actually -0.9%. This means the index’s performance is entirely down to capital appreciation. Mark said this seeming disparity is down to the unique nature of forestry investments. Even though felling and selling trees can produce a significant, if irregular, cash flow, the removal of the timber is, in effect, reducing the value of the plantations, hence the negative performance. While some investors may struggle slightly with this concept, the taxation benefits of owning commercial forestry are more clear cut. Income from timber sales is free of income and corporation tax, growing timber is exempt from Capital Gains tax and commercial woodland qualifies for 100% Business Property Relief after two years of ownership. The future outlook for forestry as an investment remains strong, according to the industry experts at the launch. There has been huge investment in timber processing facilities in the UK meaning more useful product can be extracted from each log. Demand for wood by the fast-growing biomass renewable energy sector has also doubled over the past two years. The ongoing weakness of Stirling also helps the export market. My colleague Tom Raynham, who advises funds and wealthy individuals looking to invest in farmland and forestry, says he has seen a rise in the demand for woodland as a long-term investment. “Like farmland, it is seen as a “safe-haven” investment that can offer not only significant tax advantages, but also lifestyle and amenity benefits. This makes forestry of particular interest to individuals and family offices. Knight Frank is currently selling a large block of woodland in south-west England that could appeal to investors.” Continue reading
Global Trade Of Wood Chips Has Soared Over Last Decade
18.06.2013 There has been a steady increase in the trade of wood chips globally over the last ten year, with imports reaching record-high levels in 2012. This is according to the Wood Resource Quarterly, which reveals that Japan, China, and Turkey were the countries with highest import levels, while Japan and China were responsible for 83 per cent of all hardwood chips traded last year. It has been suggested that this is as a result of significant investment in pulp capacity in the country. Over the last decade, traded volumes of wood chips have increased every year from 2000 to 2011, apart from in 2009 when demand for wood fibre was reduced and global production of pulp fell by around ten per cent. Between 2009 and 2012, the amount of chips traded increased by 6.5 million tonnes, taking the total to more than 31 million tonnes, with a value of more than $5 billion (£3.2 billion). This figure is slightly below the all-time high reached in 2011. In addition to the increased demand in China, Turkey has also contributed to the rise in chip imports as a result of the expansion of its production capacity for MDF. Although Japan remains the largest importer of wood chips in the world, the other nations making up the top ranking list have changed dramatically over the last five years. In 2011, Japan imported 11 million tonnes, down from a record high of 15 million tonnes in 2008. Whereas it was a net exporter a decade ago, China is now the second largest importer globally and is expected to continue to increase the volume of chips it brings into the country. Along with the expansion in pulp production, there is a distinct lack of domestic fibre sources in China and so its reliance on imports is increasing year after year. According to the report, China will overtake Japan and become the world’s largest importer of wood chips within the next two to three years. Japan and China are a long way clear at the top of the leaderboard for global wood chip trade, particularly in terms of hardwood chips, as the two countries were responsible for 83 per cent of the world’s total imports of the produce in 2012. Finland – the world’s third largest importer of wood chips – has been required to trade with Estonia, Latvia and Lithuania in order to meet its forestry-produce needs and this level of business has steadily increased in the last few years. According to the Wood Resource Quarterly, global trade of wood chips is expected to continue to increase in the coming years, largely because the main countries that are expanding their production capacity – particularly China and Turkey – have very limited natural resources domestically. Furthermore, a number of forestry companies are choosing to expand their sources for supply and import wood chips as an alternative to obtaining local fibre supplies. As a result, it can expected that those countries with expanding forestry industries will continue to experience solid trade growth in related produce. HD FestForest provides forest management in Estonia, Latvia and Lithuania and is a subsidiary company of HedeDanmark. Continue reading
New Forestry Investment Fund Launched
29.05.2013 A new fund has been announced that will focus on investment in forestry assets across Europe. The ForestCare Investment Fund is set to be launched by Diapason Commodities Management, which is a signatory of the Principles for Responsible Investment initiative and as such follows the guidelines relating to fiduciary duty. As a result, investments will cover forest properties and activities resulting from the industry, including forest management, wood production and processing. Furthermore, all potential investments will be subject to stringent checks with regard to sustainability, in particular their environmental, social and corporate governance impact. However, the fund will not restrict itself in terms of the type of investment, taking a number of assets into considerations, including equities, bonds, forest plots and all related derivatives. In an effort to take advantage of the comparatively low levels of private forestry ownership, ForestCare will include plots or land leases covered at least partially by forests exclusively in Europe. Forestry properties will form one-fifth (20 per cent) of the entire portfolio. On top of taking ownership of and managing forests across Europe, the fund will look to invest in shares or bonds of companies already operating within the forestry industry, providing they are doing so responsibly. Related derivatives and other investment opportunities within the forestry sector will also be considered, including biodiversity credits, carbon credits and REDD credits, which relate to efforts to mitigate the effects of deforestation. Mark McDonnell, managing director of Diapason Commodities Management, said: “ForestCare is a completely new way of approaching investment in forestry and with our approach to biodiversity in forests this investment opportunity has forest sustainability at its core.” “Crucially, the fund is structured to reconcile economic profitability with the need to make intelligent use of natural resources – providing investors with a diversified portfolio which is uncorrelated with other asset classes,” he added. Designed for those looking to invest in pension funds and institutional investors, ForestCare will have a minimum investment of €125,000 for the A class and €1 million for the institutional or I class. HD FestForest provides forest management in Estonia, Latvia and Lithuania and is a subsidiary company of HedeDanmark. Continue reading
