Why invest in forestry?

Forestry Investment – Benefits & Risks for the Private Investor

In my last article The Great British Forestry Question, we reviewed the general perception of forestry in Britain. In this article, we take a look at why an individual might consider investing money and owning forestry in the UK.

Forestry is the creation, management and sustainable use of timber resources. The British are excellent at forestry, and the UK is one of the best places on earth for growing trees. We have one of the most technologically advanced forestry and wood products sectors in the world, and the demand for timber grown in the UK consistently outstrips supply.

This article focuses on direct investments in forestry, which have been popular with professional investors and institutions for a number of years. Forestry investment funds do exist in the UK, but in our experience these schemes remain expensive and lack transparency.

Recently, Essex County Council invested £60 million of its pension fund into global forestry, and the Church Commissioners for England hold over £150 million in forestry investments.

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Whilst it isn’t necessary to invest millions in forestry to make it worthwhile, common sense would suggest that it is a suitable investment for those who have an established investment portfolio and a high personal net worth.

But what is the attraction?

Financial performance of forestry

The Investment Property Databank (IPD) provides the only measure of forestry investment performance in the UK. In May the latest IPD figures stated 21 year returns from forestry were 8.5%. In both cases, that’s better than equities and gilts over the same period, and directly comparable to commercial real estate, which has become an accepted staple of most investment portfolios.

To understand forestry investment, it is best to keep things simple. As a tree grows it increases volume through gains in height and weight. As the tree reaches maturity it has the greatest volume and therefore has the greatest monetary value. The value is realised when the tree is felled and sold. At this point, new trees are planted and the capital appreciation process restarts.

Commercially viable investments in the UK start at around £500,000 – this does not need to come from one investor.

Increasingly, we are seeing groups of investors pool funds and acquire forests with excellent results. Co-investment with friends and colleagues can be enjoyable and financially rewarding.

Investors seeking immediate income may opt to invest in a forest where some or all of the trees are nearing maturity and can be harvested to generate tax-free income. Other investors may prefer the lower costs of entry afforded to those acquiring bare land or young forest plantations – either way, both enjoy the tax free capital growth.

Tax Advantages of investing in forestry

For many investors, it is the substantial tax advantages that make commercial forestry ownership in the UK so attractive:

* 100% exempt from Inheritance Tax after two years of ownership
* Receipts from timber sales are 100% exempt from income tax
* Capital growth in timber is 100% exempt from capital gains tax
* Stamp Duty Land Tax is not applied to commercial stands of timber

In addition, investors with eligible capital gains to rollover can use the land element of an investment in forestry for capital gains rollover relief.

The Government is keen on forestry

With just 13% forest cover in the UK (compared to an average of around 25% forest cover in the rest of Europe) the UK Government is keen to promote forestry. It announced in 2011 that tax reliefs that forestry investors enjoy shall remain untouched.

An investment in forestry can be flexible and enjoyable. However, we believe that the ability to use an investment in forestry to match a future liability such as school fees or elderly care is often overlooked.

Example: Investing in forestry to cover school fees.

On their 65th birthday, an investor decides to assist their family by implementing plans to pay for grandchildren’s school fees.

The investor acquires a 100 hectare forestry plantation. It contains a well established commercial timber crop.

The investor harvests 50 hectares. They sell the timber at £32.00 per tonne. Each hectare generates 350 tonnes of timber.**

The harvest generates £560,000

There is no tax payable on income from harvesting.

According to the Daily Telegraph* the average annual cost of school fees is £27,600 per annum.

On a straight run basis – ignoring the infamous annual increases in private school fees – income from harvesting will cover ten years of private education for two children.

50 hectares of the forest remains available for harvesting, and new trees can be planted on 50 hectares to restart the capital growth cycle.

The entire investment is exempt of inheritance tax after 2 years.

*Daily Telegraph “Rising private school fees pricing out middle classes.” September 2013
** Figures represent an average quality forest investment in the UK as at January 2014

Across the financial press, forestry investment is commonly presented as a low risk investment. Our opinion is that a small number of risks that do exist, and these are significant. The three main risks when you invest in forestry are:

* Liquidity risk: to exit your investment, you need to sell your forest. This can take weeks or months depending on the quality of your investment and the market sentiment at the time. Selecting the best investments at the point of entry will mitigate liquidity risk.
* Natural hazards: trees may be vulnerable to disease or damaged by fire and wind. In some cases fire and wind insurance is available.
* Market risk: the price of timber – like any commodity – will rise and fall. Unless you are absolutely reliant on income from your investment at a specific point in time, the risk is substantially mitigated by the fact that trees can be left to grow and gain value when markets fall.

In summary, forestry investments ought to generate strong returns. Forestry is excellent for families looking ahead for ways to match projected future spending. The combination of increasing global demand for timber, improving environmental management, sensible financial returns and superb tax efficiency make this an enticing investment consideration.

Email Edward Anderson-Bickley

Honour Capital advises on investment selection, appraisal and management of forestry assets. Edward Anderson-Bickley is a qualified chartered surveyor and is Managing Director of Honour Capital.