Investing in a forest may seem a rather exotic choice for your portfolio,but there are substantial profits to be made. Jenny Lowe reports.
The past 12 months has been a tumultuous year for the global economy, with major price corrections for many asset classes. Historically, forestry has offered low volatility and minimal correlation with equities, and investors are increasingly seeing trees and land as a safe haven.
In 2008, the average total return on investments in forestry was 7 per cent. This was somewhat lower than the previous high of around 20 per cent seen in 2006, but still outperformed both equities and commercial property, which saw total returns tumble to -29.9 per cent and -22.1 per cent per annum respectively.
‘Forestry has been an investment, like any other, whose returns have gone up and down,’ explains Anthony Wyld of Forestry Investment Consultancy. ‘2006 was a vintage year for forestry owners, who, according to the IPD UK Forestry Index, saw a total return of 20.6 per cent – higher than equities or commercial property.’
How to invest
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.
For investors who prefer the collective investment route, there is an increasing number of funds to choose from, such as Cambium Global Timberland – which invests mainly in forestry that can be managed on an environmentally and socially sustainable basis – Phaunos Timber and the recently launched Stellar Forestry Fund.
However, it is important to bear in mind that an investment such as forestry is not for the short term. Jack Lutz, director of global research and valuations at FourWinds Capital Management – the appointed manager of the Phaunos Timber Fund – says, ‘Investors in the Phaunos fund, as with most forestry vehicles, need to be invested for around ten years to really get the full benefit from timberland returns. However, there is the possibility of receiving an income from the funds, so you don’t have to wait a whole decade to see something.’
The UK relies heavily on the import of timber, with approximately 85 per cent imported for its consumption. On a global scale, demand for timber is expected to increase, driven in particular by dramatic growth in consumption by China and India.
An added attraction of forestry funds is that they come with significant tax benefits, as Jonathan Gain, chief executive of Stellar Asset Management, points out, ‘An investment in forestry is extremely tax efficient. There is no income tax on harvested timber and no capital gains tax on the growth in value of tree crop. An investment will also qualify for business property relief, which provides 100 per cent relief against inheritance tax after two years.’
Of course, this is only the case for those vehicles that invest directly. Products such as the Pictet Agriculture Fund, which invests in farming and forestry companies rather than the land or trees, do not benefit from such tax reliefs.
So what are the risks?
There are a number of risks associated with forestry investing apart from the illiquidity issue. The biggest risk is, of course, nature itself – the threat of stormy winters, dry summers, fire and pests – but as Gains explains, this isn’t necessarily something to worry about. ‘There is a possibility of loss or damage as a result of fire or wind, but risks such as these will be insured against.’
A fall in timber prices is also a risk worth considering, but as those investing in this area point out, timber is a fantastic ‘set it and forget it’ investment. For instance, some argue that even if timber prices should weaken, tree owners can simply let them carry on growing till prices recover.
There is a growing demand from investors to see their money grow while also doing their bit to beat global warming, and forestry could be the ideal investment to achieve this goal.