Rising demand for timber underpins outlook for forestry investment

UK forestry investment returns have been impressive in recent years, underpinned by rising demand for domestic timber. The weaker pound has made imports more expensive while the use of wood in biomass and construction continues to rise.

Indeed, since March 2012, the mean standing sale price for UK timber has increased by 31% and sawlog prices by 19%, according to the Forestry Commission.

Currently, the UK imports 80% of the wood it consumes, according to Confor, the forestry trade association.

From an investment point of view, the sector is primarily about increasing timber production and responding to the demand for materials. There are also concerns over the future availability of timber.

The Forestry Commission forecasts a 30% decline in timber availability after 2030 in the UK, with not enough trees being planted to meet the expected demand for wood in the long term (figure 1), a trend which is likely to underpin a further increase in timber prices.

Scotland Focus

The UK has internationally low levels of forest cover, at 13% barely a third of the European average. Of this, Scotland is home to 45% of total woodland cover, according to the Forestry Commission, and the majority of market activity.

As part of the Scottish government’s draft climate change plan, tree planting targets in Scotland have been increased from 10,000 hectares per year to 15,000 hectares per year by 2025. This is a rise from 22 million to 33 million trees per year, though it’s still likely to fall short of demand.

Such ambitious targets have been welcomed by the industry, with Confor noting that as well as helping the Scottish government meet climate change targets, planting more trees will help “sustain a healthy supply of timber over the coming decades”.

Alongside the political impetus for greater planting come efforts to increase demand for home-grown timber – currently the UK is the second biggest net importer of timber in the world, after China – with plans to increase the use of Scottish wood products in construction. Such efforts are likely to help underpin the market moving forwards.

Investment Performance

Total returns for UK forestry investment in 2016, the latest available data, were 10.7%, according to the IPD UK Forestry Index. On a slightly longer three year basis, average annualised returns were 13.3%. Over 10 years annualised returns stood at 17.4%, which compares favourably with UK commercial property and other major asset classes.

Such strong performance was driven by impressive capital growth, partly underpinned by timber sales, but also by rising land values. Knight Frank’s farmland index for England shows a 74% rise in farmland values over the last 10 years, while in Scotland, growth of 85% has been seen.

A desire among investors for tangible assets which offer positive real rates of return, as well as a favourable tax status has helped underpin demand for forestry investment. Currently, 73% of the 3.2 thousand hectares of woodland in the UK is privately owned, Forestry Commission data shows.

After two years commercial forests are entitled to 100% business property relief and sales incur no capital gains tax. In addition, standing timber carries relief from inheritance tax.

Given the long-term nature of forestry investment, and that the supply of forestry for sale in the UK is limited, the likelihood is that a relatively small transactional market will continue to support and enhance capital values over the medium to longer term.