Forestry Investment - An Alternative Asset Class

Why is forestry so tax efficient?

There is no income tax on harvested timber and no capital gains tax on the growth in the value of the tree crop.  An investment will also qualify for Business Property Relief (BPR) which provides 100% relief against inheritance tax (IHT) after two years of ownership.

When does the two year qualifying period for receiving 100% relief from IHT begin?

The two year qualifying period for BPR commences when the trade starts i.e. from the purchase of a property. 

In the case of a Forest Fund, if the vehicle is already trading (i.e. it has acquired or owns a forest property) the qualifying period will commence as soon as an investor buys shares in the vehicle. If not, it will commence when the vehicle completes the purchase of its first forest property. For direct acquisitions it starts when the investor becomes the owner of the forest.

What are the main markets for timber?

Forest owners benefit from diverse markets.  There are seven main markets: construction, packaging, pallets, fencing, panel board, paper and biomass for energy and heat – this last market has led to new competition for the least valuable part of the tree and therefore increased the value of the whole tree to timber purchasers. The grower is not dependant on one market to sell timber to.

Why have returns on forestry investments been so good (the Investment Property Databank UK Forestry Index annualised 10 year return to March 2011 was 10.4%), when nominal and real timber prices have fallen by 30% and 50% respectively from their mid-1990s peaks?

The essential ingredient is the assured growth rate in the volume of timber, combined with an increase in the unit value of the timber as the trees increase in size – larger trees provide better recovery rates for sawmillers.  So even at static timber prices the investment will provide a positive return.  FIM expect timber prices to be higher in the future due to substantial increases in consumption in both the developed and developing economies, in particular China and India, at a time when supplies will become increasingly constrained.  A further factor in performance, as measured by the IPD UK Forestry Index, is a rise in underlying land values and the general level of plantation values, which are dictated by investor demand and the returns they will accept.  This is in turn partly driven by expectations on future timber prices.  Rising prices should enhance returns.

The FIM Timber Index indicates there is a degree of volatility in timber prices.  Is this an issue in considering an investment in forestry?

The benefit of forestry is that when prices drop there is no need to harvest.  Value is stored on the stump and the trees continue to grow both in volume and unit timber value.  There is generally a window of five to ten years in which a crop can be harvested, which means that the volatility in timber prices can be exploited to the landowner’s advantage.

Does an investment into a Timber Fund ensure that the tax benefits of investing directly into forestry are retained?

Yes – FIM’s Timber Funds are tax transparent and each shareholder benefits from owning a proportion of the forestry directly.

What is the minimum investment?

FIM acts for private clients with an acquisition appetite for direct ownership of amenity forests from about £300,000 upwards and commercial forests from about £750,000 upwards. 

The minimum investment into FIM Timber Funds is usually circa £30,000.

What is the advantage of investment in an FIM Forest Fund?

A direct woodland acquisition requires several million pounds of investment to gain economies of scale and diversification to minimise risk.  A single property will provide income from felling on an occasional basis, with felling coupes every four to five years.

An FIM Forest Fund provides all the same benefits as a direct investment, including the tax benefits, in a managed vehicle with a diversified portfolio which provides significant economies of scale and allows for a more regular harvesting programme to provide regular income.

Is an investment liquid?

There is an active market for forest properties which sees good properties sold quickly.  FIM facilitate the sale of interests in their Forest Funds, which generally sees interests sold more quickly than a property, often within 60 days of being instructed whereas it can take several months to market a property and close a sale.

That having been said, forestry is the same as any other property, it is potentially illiquid as there is no perfect, established market.  The trees continue to grow in volume, should a property remain unsold.

Who manages the forestry?

Experienced local woodland managers. They provide ongoing budgets for the development of the forest, which are reviewed by FIM and amended as necessary in order to ensure that the investment achieves the best possible return.

How is the forestry asset valued?

By taking into account location, the age and quality of the crop and the state of the infrastructure, in particular the access to the forest. Value can be ascertained by market evidence and calculated on a discounted cash flow basis.

Why is forestry regarded as an inflation hedge?

There is a limited supply which is constrained by the fixed area of productive forests in the UK. There is a diverse spectrum of wood-based products that permeate the global economy and ensure that demand is robust.

How expensive is it to restock a forest?

The gross cost is about £2,500 per hectare.  There is normally a planting grant available to aid re-establishment, which results in a net cost of approximately £1,750 per hectare.

What type of tree is best to invest in?

Sitka spruce produces the greatest volume of timber in the shortest time in the UK (it has a 30-45 year rotation) and has the greatest diversity of end uses.  Once established, Sitka spruce grows at about 6% per annum.

What are the main risks of an investment into forestry?

The main risks are fire and windblow. These, along with public liability, are insured against. There is currently no insurance cover for pests and disease but trees with a relatively short rotation, such as Sitka spruce, are less vulnerable to pests and disease than trees with a lifespan of more than 50 years.

By investing in a timber fund there is the benefit of greater geographical spread of risk.

What are the environmental benefits to owning forestry?

All FIM properties are managed in accordance with the UK Woodland Assurance Standard (UKWAS) and therefore have full Forest Stewardship Council (FSC) certification. This means that all harvested areas are replanted, ensuring that the forests are sustainable. Furthermore, the forests are managed in an environmentally friendly manner which encourages biodiversity. 

Forests are in the frontline in the battle to restrict C02 emissions – an investment that you can feel good about!

Is timber a commodity with a low correlation to equities and gilts?

Yes. A forestry investment provides diversity within a portfolio and helps to spread risk.

What is the potential impact of Forestry Commission (FC) land being sold into private ownership?

Private owners can invest in forests without the constraints of the public purse. This will result in them being more efficiently run, whilst also ensuring that timber remains sustainable and there is not a dramatic drop in supply.  Public access can be maintained with minimal impact on the commercial value of a forest.

These Frequently Asked Questions (“FAQ”) have been prepared by FIM Services Limited (“FIM”). By accepting this information, the recipient acknowledges that it will, and it will cause its directors, partners, employees and representatives to use the information contained in the FAQ for information and discussion purposes only and that no reliance may be placed for any purpose whatsoever on the information or opinions contained in the FAQ. The FAQ is not an offer or a solicitation of an offer or a recommendation to buy or sell any securities, assets or investments, nor shall it be deemed to provide investment, tax or accounting advice. The views reflected herein are those of FIM and are subject to change without notice, and FIM has no obligation to update its opinions or the information in the FAQ. FIM does not represent or warrant or give any other undertaking that the information or opinions in the FAQ are accurate or complete. Neither FIM, nor any affiliate, nor any of their respective directors, partners, officers or employees or any representative accepts any liability whatsoever for any direct or consequential loss arising from any use of the FAQ or its contents.