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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
IPD UK Forestry Index
Fiona Mannix Associate Director of RICS Land Group (RICS) 15 May 2013 This week I attended the launch of the IPD UK Forestry Index in London. This index is calculated from a sample of private sector coniferous plantations of predominantly Sitka spruce in mainland Britain. For 2012 this index produced a significant return of 18.3%. The index as it stands covers five regions; North / Mid / South Scotland, North England and Wales – South of England being excluded for obvious reasons. As at Dec 2012, the index represented results from 148 plantations with a combined value of £220.7 million with over half of that value located in Scotland. The point was made that the index represents upland forests. Demand for commercial forests in Britain currently outstrips supply – a familiar tale to many involved in the farmland market. While commercial forestry, as with farmland, enjoys significant tax advantages it’s important to note that there are a range of other drivers also leading to demand. Land based assets remain attractive to investors. For those who accept the longer term nature of commercial forestry investment, it provides an alternative home for cash deposits in times of low interest rates and is also suitable for those seeking a stable less volatile investment. While the main component on the return side is the capital value appreciation of the land, there is a return on the timber sales side. While the very nature of commercial forestry means cyclical felling provides investors with irregular returns, it does yield substantial income. It was very interesting to note that over the past five years commercial forestry showed a total return of 17.7% versus the all commercial property category which showed an overall return of 0.7%. While we know that the last five years is not representative it is nevertheless worthwhile to note that even over the longer timeframe of 20 years commercial forestry returned 8.1% versus all commercial property returning 8.9%. A number of interesting additional points were raised throughout the event and in particular during the Q&A session which I have outlined below. Is forestry the perfect hedge? Commercial forestry as an asset class can be used to mitigate risk elsewhere in an investment portfolio There will be increased demand for wood in the longer term Increasing demand coming through on the biomass side The industry needs to be able to explain itself to potential investors Is there sufficient land to keep replanting at the rates required? Will the industry be in a position to satisfy the demand requirements over the longer term? How should the planting of commercial forestry be incentivised? What to do about planning issues? The future is bright – the future is green Continue reading
Forestry Investments in Emerging Markets
the Netherlands – 30 May, 2011 Investments in forestry have many desirable features. Under certain conditions, forestry investments yield attractive returns to investors and can contribute substantially to the economic, social and environmental development of countries. Environmentally and socially conscious investors are actively exploring the “ins and outs” of forestry opportunities, motivated by opportunities that are profitable, but also in line with their core values. Between the 17th and 19th of May 2011, about 50 participants attended the meeting “Forestry Investments in Emerging Markets.” About one third of the participants were socially and environmentally conscious investors and investment advisors. Another one third of the participants jointly represented 17 investment opportunities in the tropical hemisphere, together worth over 95 million of investments in responsible forestry. The meeting took place in the Netherlands, a country with significant expertise in tropical forestry and a history of public and private investment in forestry in developing countries. The meeting was organized by FAO , the NFP Facility and Tropenbos International with support of the Business in Development Network , and the Ministry of Economic Affairs, Agriculture and Innovation of the Netherlands. The meeting was attended by institutional investors, investment advisors, timber funds, forest business developers, and forestry specialists. Selected NFP Facility partner countries attended the meeting. Participants from these countries included forest finance professionals that have worked domestically to identify promising business opportunities. Objectives of the meetings were to: Share perspectives on challenges and opportunities regarding the greater involvement of investors in forestry (REDD+, biodiversity, forestry) in emerging markets Showcase and discuss a variety of forestry-based business cases and fund structures as a basis to better understand the requirements and potential of such business cases and for collaborative work between potential investors and promising forest business initiatives in emerging markets. Contribute to an action plan to narrow the gap between investors and forestry opportunities. The interactive programme – consisting of plenary, panel and group sessions – provided and informal platform for exchange and engagement among participants. Seventeen businessfact sheets from seven countries provided the basis to discuss in concrete terms the risks and opportunities to invest in forestry in emerging and frontier markets. The cases included plantation forestry, natural forest management, processing and alternative businesses. In addition, several participants shared short notes on their work, which were contained in the information package. Publications Documents Presentations Contact Media Report: Forestry Investments in Emerging Markets Information package Business Factsheets Programme: Forestry Investments in Emerging Markets List of participants to the Forestry Investments in Emerging Markets event Continue reading
