Why Invest in Forestry?

Investing in forestry and timberlands is not new – many people think of David Swensen at the Yale Endowment when the topic comes up.  Others will go further back to Otto von Bismarck and his banker Gerson von Bleichroder in 19th century Germany.

What those historical investing icons recognised in timber as an asset class are exactly the same characteristics that still exist today – a real asset that produces income, gives inflation protection, doesn’t correlate with financial assets and grows.

Biological Growth

Regardless of what GDP or the stock or bond markets are doing, trees will grow and the volume of timber that is standing in the forest available for sale will increase every year.

Inflation Hedge

Forests are real assets and historically pricing correlates positively with inflation. For those worried about deflation, the available history suggests that, as with other real assets, they have outperformed financial investments in deflationary times.

Source: Weston Green Consulting 2015 The Future of Forestry - The Local Impact of Global trends Presentation

Tax benefits

  • Tax free income – Proceeds from UK timber sales are tax-free whether the asset is held personally or by a company
  • Tax free capital gains – Increase in value of standing timber is exempt from capital gains tax (excluding increase in underlying land values)
  • Capital gains roll-over – Proceeds from the sale of capital assets can be reinvested in UK commercial forestry land to defer the capital gains
  • No Inheritance tax – Qualifies for Business Property Relief after two years of ownership

Uncorrelated and low volatility

On UK data, the last 10 year volatility of returns has been slightly higher than corporate bonds and correlation against stocks and bonds has been below 0.3.

Income

Forests produce healthy but lumpy and irregular cash flows, largely from timber sales. A diversified portfolio of mixed ages of trees can produce the income profile to smooth the peaks and troughs from individual forests.

Environmental credentials

Trees absorb carbon – the faster they grow, the more they use. Planting trees is therefore a viable answer to climate change. The end timber product is substantially less energy intensive to produce than other building materials or energy sources.

Growing demand for timber

Growth in emerging markets, increasing use in the construction sector globally and increasing biomass power usage have all contributed to a significant upwards trend in demand for timber over the last 50 years. That demand growth rate is forecast to accelerate over the coming years.