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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 →