Can’t see the wood for the trees when it comes to your investments? Well take a step back and consider investing in exactly that – woods and trees.

Forestry investing is becoming more popular and more accessible for the average individual investor. At one time, direct investment was the most common option and so inevitably the smaller investor tended to be somewhat marginalised. Now there are unit trust, investment trust, exchange-traded fund (ETF) and SIPP options for investment in forestry and timber, as well as more individual investor friendly direct investment packages.

Growing returns
According to the IPD UK Property Index, 2007 – the most recent year for which figures are available – was an exceptionally strong year of performance for UK forestry, where the average total return was 31.6 per cent, up from 20.6 per cent in 2006 and double the 14.4 per cent total return in 2005.

In 2007, the annualised three-year return was 22.0 per cent per annum and the five-year annualised return was 15 per cent. At this point, the 15-year annualised return since the start of the index in 1992 was 5.1 per cent per annum.

The 31.6 per cent return meant forestry investments outperformed equities, gilts and commercial property, and for the first time since the start of the index in 1992, it had also outperformed all three of the other asset classes over the three-year period to 2007 (beating gilts and commercial property over the five-year period as well).

Forestry is a compelling investment sector for a many different groups of investors, from those looking simply for profits or a hedge against equity investments to those looking for an environmentally sound home for their money. Its proponents argue that in forestry they can find all three.

Tax incentives and diversification
Forestry also offers tax incentives for investors, particularly for capital gains tax purposes – the increase in the value of timber is exempt from CGT. While any increase in the net value of the land on which the trees are growing can be assessed, land value currently only accounts for approximately 15 per cent of the value of mature woodland.

In addition, income accrued from a timber crop is exempt from income and corporation tax . Finally timber qualifies for 100 per cent business property relief if it has been held for two years, so no IHT is payable.

For investors who prefer the collective investment route, there are two investment
trusts that specialise forestry and timber section: Cambium Global Timberland, an AIM-listed company and Phaunos Timber.

‘Cambium is running at 30 per cent discount to NAV and Phaunos at 33 per cent discount,’ says Tim Cockerill, head of research, Rowan & Co. ‘That is probably good value because both trusts have been putting money into buying forestry over the past year or so and I don’t believe they have overpaid for it. So if investors wanted to take a shorter-term view then Cambium on a 30 per cent discount is something well worth considering, but look at the annual report and accounts. Over the long term, look at the Quadris Environmental Fund, an open-ended fund registered in the Isle of Man.

‘The Quadris fund comes across as a very well-managed business,’ says Cockerill, ‘It manages something like 50,000 hectares of land in Brazil and not just as a business venture to maximise profits, but there is a huge community aspect to it in that they provide schools, healthcare for their employees and create long-term futures for their workers. Long term, I believe it is a much more sustainable approach. Also, you can only deal monthly in it and there is an exit penalty, so it attracts long-term investors.’

Global reach
Another key aspect of these funds is that they invest on an international basis, drawing on the expertise of specialist advisers. A good example of this is Silva Tree, a company which is involved in a number of conservation, reforestation and renewable energy projects in Costa Rica. These include The Carbon Offset Reforestation Project, which helps to conserve and replace the Costa Rican rainforest by purchasing rainforest plots from private owners.

In general terms, forestry investments are a specialist area and this is especially true when dealing with projects in developing economies. Jayampathi Perera, a director of Oxigen Investments, which specialises in the production of tropical hardwoods, such as teak and agarwood, from its own commercial sustainable plantations, points out that ‘Throughout all the volatility in the stock markets, timber prices have remained extremely stable. Shares go up and down, but trees keep on growing.’

He adds, ‘Even if timber prices should weaken, tree owners can simply let them carry on growing till prices recover. Thus timber is a fantastic “set it and forget it” investment. There is also a growing demand from investors to see their money grow while also doing their bit to beat global warming.’

Sustainable approach
Oxigen invests in hardwood plantations in Sri Lanka and Malaysia. The approach is for investors to lease a forestry investment plot, for a minimum investment of £10,000, and then receive 100 per cent of the net profit when the timber from that plot is harvested and sold.

Perera points out that ‘Only one per cent of global teak production comes from tree farms. The rest comes from natural rainforests, most of it illegally logged. More and more countries, and most recently the EU, are outlawing the import of unsustainably harvested wood. But hardwood prices have kept on rising, by around 15 per cent a year between 2002 and 2006. Teak returns during the past 18 years have averaged almost ten per cent a year.’

He suggests that ‘Timber is also an attractive investment for SIPPs and is particularly suitable as a long-term investment in Child Trust Funds. However, it differs from most other CTFs where you see nothing over the term of the investment. Oxigen gives investors the opportunity to take dividend payments when it suits them.’

And Perera adds, ‘We are also pioneering a new type of investment – “agroforestry”. Quite literally, this sits side by side with timber. It combines traditional forestry and agricultural processes to achieve maximum land productivity. During a forest’s early development there are many opportunities for “interpolation”, interplanting various crops between the trees. Produce such as maize, dragon fruit, pineapple, bananas and mangos flourish in tropical plantations in Sri Lanka and Malaysia where Oxigen is growing agarwood, teak, acacia and sugar palm trees.’

He explains, ‘So Oxigen is now offering investors who have already bought trees on its plantations, or have committed to do so, the opportunity to buy agroforestry land in ten-acre blocks. The minimum investment is £25,000, and Oxigen, backed up by harvest profits, will pay investors an annual rental income of between eight and 15 per cent on their investment.’

A range of options
Graham Stuart, a director of Graham Stuart & Associates, a firm of independent business consultants who specialise in eco-friendly land and forestry projects, uses this type of project, either as stand-alone investments or as part of its Eco Land & Property SIPP.

He argues that ‘There are different packages for different people dictated by their exit strategy. They may be retiring in five or ten years’ time, or even 20 years because this
is also a good asset to invest in for children. Instead of putting £10,000 into a bond, why not invest in trees? While the child is growing the tree is growing.’

Stuart adds, ‘Although funds buy forestry, this approach is giving individual people the opportunity to invest directly with a forestry company at a level they can afford.’ He concedes that the minimum investment is £10,000 but adds that most forestry companies offer plots for £100,000 to £300,000, ‘which is out of the ball park for most people’. As for risk, Stuart says the plantations are insured and the forestry companies create communities for the people who manage the trees.

Worth the risks?
Julie Bayley, owner-IFA of Keswick IFAs has used forestry as an asset class to hedge against stock market returns for the last seven years, for example using the Quadris fund, but she accepts new clients may be concerned about the risks.

‘We have been a great proponent of clients looking at alternative investments within their portfolios to hedge against stock market volatility,’ she says, ‘Whatever people put their money into, the whole remit of risk has been turned on its head in the last 12 to 18 months. At one time, financial institutions were as safe as it got and that has been proved wrong. So yes, there is a risk in investing your money in a tree, but so there is putting your money in a share certificate in a company where you don’t know if they are going to survive in six to 12 months.’

Bayley also concedes if you are looking to invest through a unit trust or an OEIC ‘That is a different kettle of fish because you have a fund manager who has looked at the equities he is investing in and is taking on the asset allocation decisions within that fund. That is different to investing in the hard assets.’