As indicated elsewhere in this series, investing in forestry warrants serious consideration. Historically attractive long-run returns relative to other investment classes, low volatility and high correlation with inflation, make a forestry investment a good inflationary hedge. Investing in forestry can help to bring balance and stability to an investment portfolio otherwise biased towards financial securities (such as equities and gold) offering the prospect of higher returns but carrying the risk of greater price fluctuation. In this instalment of our forestry investment series, we take a look at the options available to investors considering exposure to this alternative investment class.
Forests or Forestry Products?
A basic decision the investor needs to make is whether the investment is directed towards a real estate investment in forestry– timberland and timber - or to the downstream production of forestry products. Of course, the two enterprises may be vertically integrated, with the forest owner also operating a timber mill, for example, or a pulp mill. We’ll look at such integrated operations below, in the context of indirect investments such as equities and funds, but for now we consider direct forestry investments in either a standing forest or in the establishment of a new forest.
Direct Forest Acquisition
Generally speaking, the purchase of a forest, or an area of forest, for income generation will require a significant outlay in the United Kingdom and other developed countries. Allowing for the costs of husbanding and harvesting trees, the likelihood of restrictions on the quantity – percentage-wise – of trees which can be harvested, and in all probability a replanting obligation, the purchase of a small tract – say five to 10 acres – will not translate into meaningful income. At best, the purchase should be seen as an investment in a lifestyle or amenity choice, albeit with the possibility of a capital gain on a future sale.
For income generation, something appreciably larger will be needed – in the order of, say, 100 – 200 acres. But even then, the traditional income stream from forest ownership – the sale of timber – has over the past two decades shrunk dramatically as a rate of return on the purchase price of the land.
Nevertheless, direct forestry investments remains viable for the individual private investor. At the time of writing, for example, a large tract – over 110 acres – of mixed deciduous and coniferous forest just outside the M25 south of London was on the market for £395,000. At around £3,300 per acre, this is top-end pricing – in more remote parts of the UK, mature timberland can be had for much less. A stand of 187 acres primarily coniferous in north Wales, planted in 1983 and five-10 years away from mature harvesting, is currently on the market at just over £1,300 per acre.
An attractive feature direct forestry investments in a number of countries is the favourable taxation treatment afforded by governments keen to encourage woodland conservation. Thus, for example, inheritance tax in the UK is waived on forests owned for more than two years at the time of death, there is no income tax on timber sales and capital gains tax is limited to the value of the underlying woodland and does not extend to the growing timber.
But unless the investor has particular experience of managing a forest, an ongoing cost which needs to be factored into a forestry investment is the engagement of such expertise. Whether or not the standing timber is the rationale behind the investment, careful husbandry of the forest will enhance both investment and amenity value. Especially at the time of purchase, the investor will need an impartial expert assessment of the stand and its future value in harvestable timber and other forest products. Such objectivity is unlikely to come from the seller or the seller’s agent.