Money Grows in Trees

With a predicted shortfall in timber supply, the rising price of forestry land and the growing business of biomass, it’s no surprise investors are putting their money in forests.

The forestry sector has changed markedly in recent years – formerly an asset held for its capital value, timber is now emerging as a vibrant market in its own right. Booming demand for biomass is helping to underpin the global market, so how can investors maximise their returns?

The five key considerations when investing in forestry are: location; physical condition of the soil; species of tree; age of tree; and access. “If you can tick all of those boxes and are investing for 20 years or more, you will do well,” says James Adamson, investment and business development manager at Scottish Woodlands, which works closely with Savills advising clients in Scotland and further afield.

“By its very nature, forestry is a long-term investment; you can go 30 years or more without any income whatsoever,” says James. But it is not just the cash generated by timber sales that produces a return for landowners and investors – it is the appreciation of land values.

“In 2013 the average price of all forestry sold in the UK was £7,000 per hectare, with the best fetching over £10,000 per hectare and the worst £1,000. That compares to an average of £2,100 in 1998 and £4,000 in 2008, which is why people have made so much money.”

Although capital growth may not continue at such high rates in the future, James reassures investors: “The future of timber is fantastic – globally we are short of timber over the next 25 years, which has got to be positive for prices.”

In the UK, Sitka spruce makes up 56 per cent of softwood reserves, and is mainly used for construction timber, some is also processed into products such as MDF and plywood, with agricultural fencing and paper each accounting for 5 per cent of the harvested amount.

“Wood fuel, which was nothing 10 years ago, now comprises 12 per cent of the market,” says James. “The biomass sector has grown very rapidly, both on a private and industrial scale – the key point is this is not substitute demand, it is entirely new demand.”

 

"Sub-Saharn Africa offers excellent returns without exceptional risk, with eucalyptus and pine plantations growing rapidly and providing considerable economies of scale"

 

Globally, foresters select the most appropriate species for their environment, with temperate climates best for conifers and tropical regions better for hardwoods. “In the UK, Sitka spruce grows on a 35-55 year rotation, as it loves our mild wet weather,” says James. Northern Europe favours Scots pine and Norway spruce, with more beech and cork oaks in southern Europe and Turkey. Further south again, and you get into the regions of teak and eucalyptus, before heading back into conifers in the more temperate parts of the Southern Hemisphere.

There are plenty of investment opportunities, ranging from private forestry buyers to large institutional investors and funds. “Funds will accept stakes from £25,000 upwards, while individual forests will change hands from £300,000 to over £1 million,” he adds. “The UK market only turns over about 12,000-13,000 hectares a year, so really large institutional investors look elsewhere.”

Mature markets typically offer greater investment security, albeit usually at lower rates of return. Over the past 21 years, UK forestry has returned about 8.5 per cent a year, including capital growth – although when rising land values are excluded a realistic return is around 1 per cent at current timber prices – which have been impacted by the economic downturn across the world.

Most established markets in developed economies return less than 7 per cent, with established markets in developing countries at between 7 and 9 per cent. Emerging markets such as Eastern Europe and Central America carry greater risk but potential returns of 10 to 15 per cent, while pioneering markets such as Russia, China, Indonesia and west Africa offer the highest risk and returns.

Anyone seeking to invest in forestry abroad should ensure they understand the political situation and security of their investment, warns Hugh Coghill, of Savills Rural. Unstable governments and illegal logging are of particular concern in some of the higher risk areas.

One region that offers excellent returns without exceptional risk is Sub-Saharan Africa, with eucalyptus and pine plantations in the Rift Valley growing rapidly and providing considerable economies of scale. Trees planted in 2010 should start producing income from 2020 to 2035, with a forecast return on investment of between 10 per cent and 19 per cent, before any capital uplift in land.

Investing in forestry or owning commercially managed woodland is extremely tax efficient, as under current rules, timber is generally not treated in income and capital tax calculations. Woodland on agricultural land – such as shelter belts – can qualify for agricultural property relief, and it is even possible to defer the inheritance tax value of growing timber on amenity woodland through woodland relief which holds the tax until the asset is realised and funds released for settlement.

Altogether, it seems, the future is in the trees.

Read the full magazine online.

 

 
 

Key contacts

Jonathan Henson

Jonathan Henson

Director
Estate Management

Savills Perth

+44 (0) 1738 477 511

+44 (0) 1738 477 511

 
 

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