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.” Taylor Scott International