Money may well grow on trees if returns from forestry assets over the past few years are anything to go by.
Forestry investment has become an increasingly attractive asset class as timber prices rocket amid a sustainability drive and inflation concerns.
Managers like Gresham House have been boosted by the performance of their forestry divisions, receiving income from harvesting the trees and selling the timber.
Magic money tree? Forestry has become an increasingly attractive asset class in recent years
The average investment, however, tends to be around £50,000 according to Wealth Club data and has largely been the preserve of high net worth individuals and/or sophisticated investors.
We look at whether forestry is a good investment class and how everyday investors can gain exposure to the asset class.
Why invest in forestry?
Ambitions around ESG and sustainability have driven a lot of interest in forestry and strong returns in recent years mean it has become increasingly attractive to investors.
There has also been a strong driver towards real asset investment, whether in renewable infrastructure or commercial property.
iShares Global Timber & Forestry ETF posted returns of 16.75 per cent while Pictet’s forestry fund returned 22.06 per cent last year.
By comparison, the IA UK Direct Property sector returned 7.43 per cent, according to Morningstar data.
HOW DOES FORESTRY INVESTMENT WORK?
Investment in forestry is a long term commitment.
The trees in commercial forests tend to be Sitka spruce, a fast-growing conifer that is suited to Britain’s weather.
As they grow they should benefit from value appreciation and any income produced by harvesting the trees and selling the timber.
The main part of the tree is usually used in construction but offcuts and chippings can be used for pulp and biomass.
Timber is an important part of many leading economies, including the UK. The wealthier a country the more consumption of timber, through construction, furniture, packaging, newspaper and biomass for electricity production.
Unlike property it is technically finite but the ability to increase supply happens over longer cycles.
Returns driven by three main factors: biological growth of the crop, increase in the value of timber, and increases in the value of the land.
The traditional income source from forestry is timber for things like construction, packaging, furniture, and biomass for electricity production.
Timber prices are expected to increase significantly over the next few years, as the global population and GDP per capita rises.
In a recent outlook note, forestry manager Gresham House said: ‘Legislative and environmental constraints will continue to restrict timber supply due to reductions in unsustainable harvesting and illegal logging.
‘As these factors combine Gresham House expects that both global and domestic timber prices will rise significantly in the medium and long-term.
Gresham House, therefore, believes that now is an opportune time to acquire UK forestry assets, in order to benefit from the expected rise in timber prices and therefore asset values.’
Against a backdrop of rising global population and urbanisation prices are likely to push even higher.
‘The trouble with supply and demand in forestry… the supply doesn’t really alter that much, it takes a very long time for the supply of forestry properties to change and the demand can change very quickly,’ says Peter Chappell, head of forestry investment at Tilhill.
‘The affluence of the population is going up and the quantum of building materials per capita the world is using, the amount of it that has to be based on sustainable materials like timber rather than steel or concrete. So the macro trend of demand is set to increase a lot… The pressures on timber prices will go further upwards in due course…’
Olly Hughes, head of forestry investment at Gresham House, adds: ‘Over this period there’s going to be a relatively flat, sustainable supply of timber and so you’re going to see a very strong supply/demand imbalance continue. So we think outlook remains very positive for timber and timber investment.’
As well as strong performance, forestry investment offers considerable tax benefits.
Timber sale revenue is free of income and corporation tax and there is no capital gains tax on growing timber. Additionally, there is 100 per cent inheritance tax relief after two years due to business property relief.
However, investors should be aware forestry remains a high-risk illiquid investment that is held over a long period, possibly ten years or more.
Just how sustainable is forestry?
Sustainability has been significant driver of investment into forestry given the transition away from carbon-intensive products like concrete and steel.
‘What can be done with forestry makes it quite attractive to some of these institutional players because it’s an easier way for them to attract capital if they can tick those boxes,’ says Chappell.
Olly Hughes, head of forestry investment at Gresham House, thinks timber prices will continue to rise as demand rockets
Hughes also notes the increase in investment from institutional players into timber: ‘In the last two or three years there has been a significantly greater increase… that has been a quantum shift and certainly our funds now have very strong support from institutional pension funds and insurance companies.’
Even the Church Commissioners have invested around £400million in forestry. In 2020, its investments paid for 2.5million trees to be planted.
The ESG case for forestry is an obvious one: protecting the environment, enhancing biodiversity and helping with carbon sequestration.
But there are concerns forestry firms’ afforestation plans are not as sustainable as they appear on the surface.
Plans by investment firms to encourage more trees to be planted on Welsh farming land have come under fire for ‘destroying communities’. The Welsh government has said it will launch a consultation on its national Forest Plan.
Farmer John Thomas sold his farm in Camarthenshire three years ago but earlier this year it was sold onto Foresight Group, as reported by the BBC.
At auction the farm was sold for more than £2million, far exceeding the guide price.
At the time the company said: ‘A key focus of our approach is to ensure that any land use change is done in as sensitive way as possible. As part of any new scheme, we always engage and consult with local communities.’
Hughes admits that given the target for planting trees in the UK ‘we’ve got to work out a way where it’s appropriate to plant trees and where it’s not.’
‘The key is making sure we get the right tree in the right place.. I think we’ve also got to look at the positives to communities that tree planting can bring.’
‘It isn’t all around closing out that land to access… certainly ensuring that there is public access… It creates jobs, it creates a whole array of benefits to a local community which may not always be reflected within some of the commentary that is made.’
‘Also understanding that there are some very large targets that we’ve got to hit and how we best deliver that so I think there’s no right or wrong with this but I think we’ve got to be sympathetic to local communities and understand how they work…’
How to invest
Forestry has undoubtedly delivered impressive returns, offers tax relief, and demand will increase pushing prices higher.
It is little surprise institutional investors are drawn to it and a number of experienced private investors are doing the same but what options are there for an average investor?
Gresham’s timber funds are unregulated collective investment schemes and are therefore subject to restrictions on their promotion.
In order to be provided with information in relation to the funds you must be an investment professional authorised to advise on UCIS; have completed a suitability assessment as a certified high net worth investor or self-certified sophisticated investor; or an eligible counterparty or professional client.
There are other ways to gain exposure to forestry, however.
The recently listed Foresight Sustainable Forestry Company offers investors direct and liquid access to UK forestry.
The investment trust, which is targeting a net total return of more than CPI +5 per cent, looks to buy grazing land in the UK with the view to growing trees for timber.
Elsewhere, the iShares Global Timber & Forestry UCITS ETF tracks the performance of 25 of the largest global companies engaged in the sector.
Its top 10 holdings include materials companies West Fraser Timber and Svenska Cellulosa as well as real estate investment trusts Weyerhaeuser REIT and Rayonier REIT.
It has delivered returns of 13.33 per cent over the past year, marginally below the S&P Global Timber & Forestry Index which delivered 13.87 per cent. Over the past decade it has returned 156.3 per cent.
Pictet’s timber fund has also performed well, delivering 12.73 per cent returns in the year to 31 January 2022, and 75.63 over five years.
The fund mainly invests in equities of companies involved in forest planting and management. Like the iShares ETF it has invested in Weyerhaeuser and Rayonier as well as West Fraser Timber.
More than 16 per cent of its holdings are held in packaging and pulp companies, including FTSE-100 listed Mondi.