FORESTRY investments have posted their best returns for more than a decade thanks to surging timber prices and generous tax breaks.
Investors enjoyed an average 14.4% return in 2005, the highest since 1992, according to new figures from the IPD. Although woodland failed to beat the 22% return from shares, it comfortably outclassed the 7.4% return from bonds.
Many investors reckon it is part of a longer-term upturn. Timber has a low correlation with other asset classes and has not been hit by the stock- market downturn, making it a powerful addition to a diversified portfolio.
But the tax breaks are the biggest attraction for many investors, as woodland is now one of the quickest ways to cut an inheritance tax (IHT) bill.
“The forestry market has been buoyant, with many investors appreciating that forestry returns are tax-free and that the assets sit outside the IHT net,” said Alistair Sandels at Fountains, which manages forests on behalf of investors.
“Steady timber-market rises, new UK markets and worldwide commodity shortages should continue this trend.”
Forestry investment has benefited from renewed strength in timber prices after a dire period in the 1990s and the turn of the millennium.
Timber is the fourth largest import into Britain, and, for many years, Britain’s tree growers have struggled to compete with overseas producers. Their main competitors are the Baltic states of Latvia, Lithuania and Estonia, as well as Ireland, Finland and Sweden.
But demand for British timber is growing at home and abroad.
Timber prices, measured by the Forestry Commission, plunged nearly 70% between 1995 and early 2003. But prices were 13.6% higher in the year to the end of March and fund managers think there is further to go. Taking inflation into account, timber prices are 52% below the peak achieved in the mid-1990s.
The development of wood-burning power stations in the UK is particularly welcome for British timber growers. Three are under construction and are expected to consume 12% of British timber when they are up and running.
Sandy Greig at the Forestry Commission said: “Wood fuel has the potential to provide a hugely significant market for English forestry.”
UK growers have also been helped by a shortage of supply in other regions. Rising demand from Asia, particularly China, is helping to swallow up a lot of the wood being produced in the Far East.
Growing domestic demand and increased red tape in the Baltic states also means they are exporting less to Britain.
The euro’s strengthening against sterling since summer 2003 has made timber from Europe more expensive, enabling UK prices to climb.
Although British investors still regard forestry as an exotic investment, in America it is fast becoming mainstream.
Harvard University, for example, has said that it aims to have about 10% of its $26 billion (£14 billion) investment fund in timber.
Yale University has also invested in forests in the hunt for higher returns, as have many of the big pension funds. So far, the UK’s insurance and pension companies have steered clear, but advisers say that where America leads Britain often follows — which should boost prices further.
Even if prices do not live up to expectations, the generous tax breaks make forestry a compelling investment. Colin Lees-Millais of Forestry Investment Management (FIM), a woodland investment firm, said: “Following the chancellor’s latest purge on trusts we expect increasing interest in timber as an IHT planning tool.”
In the budget, Brown sneaked in hefty tax penalties on two types of trusts that are commonly used to pass on wealth free from the tax.
