It sounds the ideal investment. Buy a piece of woodland, feel good about preserving the environment — and enjoy a financial return as you harvest some of the timber you have planted.
However, few people know much about the industry and there aren’t many investment vehicles specialising in timber or forestry. So what are the pros and cons of timber as an investment?
Four Winds Capital Management, which runs the Phaunos Timber Fund, points out that timber can be seen as a “green” investment because it consumes CO2 and produces oxygen. What’s more, Four Winds reckons that the increasing demand for wood products from a growing global population, coupled with cutbacks in harvesting by some governments, means that prices for timber are likely to remain buoyant.
China’s appetite for raw materials will be a key factor in determining the future price of timber. Some analysts have predicted that prices could soar by 300 per cent over the next decade as China imports vast amounts of timber to build new homes for the 20 million people moving to the cities each year.
Returns on forestry investment have certainly been good in recent years. The Investment Property Databank (IPD) UK Forestry Index shows that forestry outperformed shares, bonds and commercial property over the medium term, with the five-year return running at an annualised rate of 16.2 per cent. But it performed less well than these assets over the long term, with an annualised return of only 5.2 per cent over the 16 years to 2008. This is partly because timber prices fell sharply in the period 1995 to 2003, thanks to a combination of increased recycling of wood, a flood of low-cost imports from the Baltic states and a strong pound, which kept imported timber prices low. Forestry, though, tends to be less volatile than other assets and it brings an important element of diversification to an investment portfolio.
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Then there are the juicy tax breaks to consider. Income generated from commercial woodland is exempt from income tax and corporation tax. Forestry land and the trees growing on it are exempt from inheritance tax, provided the owner has held the assets for at least two years. Finally, there is no capital gains tax (CGT) to pay on the growth in value of tree crops, only on any rise in the value of the land.
James Norton, of Evolve Financial Planning, an independent financial adviser, adds a note of caution: “Despite the attractiveness of these tax reliefs you shouldn’t let the tax tail wag the investment dog.”
So how do you go about investing in forestry? One option would be to invest directly with the help of a forestry investment specialist, such as FIM Services. However, this does not come cheap. Steven Oliver, the director of property at Close Asset Management, the wealth manager, estimates that investors would need a minimum of £250,000 to buy a commercially viable piece of forestry, while even a small piece of woodland for a “lifestyle” investor would cost about £20,000.
It takes 30 to 35 years for a typical conifer to grow from a sapling to a fully mature tree. Investors unwilling to wait can buy a piece of woodland closer to maturity, or plantations of differing ages. Prices for timber that has just been planted stand at about £500 per hectare, while those for mature trees of 30 years will average about £4,000 per hectare. Anthony Wyld, of Forestry Investment Consultancy, says: “On top of this purchase cost investors would need to set aside annually about 2 per cent of their investment’s value for the management of their timber plantation. So on an investment of £300,000 the annual cost would be about £6,000.”
Alternatively, they may choose to invest in a fund, where all the management and administration is done for them and the entry price is lower than for direct investment. The £4 million First Stellar Forestry Fund has a minimum investment of £15,000. The initial charge is 5 per cent, with an annual fee linked to the overall return on forestry, currently about 0.5 per cent. There is also a performance fee of 25 per cent if the managers beat the IPD forestry benchmark over the ten-year life of the fund.
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The £400 million Phaunos fund has an annual charge of 1.5 per cent and a 20 per cent performance fee if the target return is exceeded. Investors would need to purchase the fund’s shares through a stockbroker.
Those looking for the cheapest form of exposure to timber could consider the iShares timber and forestry ETF (exchange traded fund). It has a low total expense ratio (annual charge plus other costs) of 0.55 per cent and would also incur a dealing charge of about £12 to £15 as ETFs have to be purchased through a stockbroker.
However, as Mike Horseman, of Cockburn Lucas, an independent financial adviser specialising in commodities, points out, the ETF does not offer direct exposure to timber, but buys into 25 of the largest publicly quoted companies in the timber industry. He says: “The returns may be good, but investors should be aware that they are effectively buying a stock market product rather than timber as such. A shortage of equity investors could push down share prices — and thus the price of the ETF — even when timber prices might be going up. The same applies to the forestry funds, which could suffer from distortions caused by changes in investor demand.”
He concludes: “Forestry is fine as an asset class in principle, provided it is part of a balanced investment portfolio. But you need to be aware of the pitfalls, such as potential liquidity problems. You also need to make certain that you are insured against fire and storm damage or you could find your investment is wiped out.”
Case study: ‘Safe and steady suits me’
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Peter Kaiser wanted somewhere safe and steady to put a large chunk of money after selling a property last year. He decided to invest in the First Stellar Forestry Fund.
Mr Kaiser, 74, a retired company director of Croydon, South London, says: “My financial adviser — Stephen Coupe from DaVinci Wealth Management — suggested the idea and I jumped at it. Wood is a scarce resource, so there’s always going to be a market for it.
“Timber is a long-term investment and that suits me as I am not interested in playing the markets. The tax advantages are also attractive, with no income tax to pay and no inheritance tax.”