Lauren Razavi explores the investment opportunities in the forestry sector for Portfolio Magazine, Emirates' first-class passenger publication.
Money might not grow on trees but it can certainly be stored in the woods. What is more, investing in the woods is increasingly popular. Between 1990 and 2010, the National Council of Real Estate Investment Fiduciaries’ Timberland Index, which measures forestry investment performance in the US, logged a 10.7 per cent annual return. And in the UK the Integrated Project Delivery (IPD) annual forestry index recorded a comparable nine per cent annual total return in the country’s forestry investments from 1992 to 2015. According to 2012 records held by the United Nations’ Food and Agriculture Organisation, institutional investors held $50 billion in forest assets.
One reason for this trend is the stability offered by forestry. Although timber is a crop, like maize or sugarcane or spinach, trees don’t turn from saplings into towering conifers in a single season. Forest owners must wait decades before felling them and earning a profit. During that time, a forest gains value as it grows and if the price of timber falls or demand shrinks, trees can simply be left standing until favourable market conditions return.
“As trees grow to the point of harvesting maturity, the value stored on the site increases because the volume of timber of the site has increased and the time to maturity decreases,” explains James Adamson, head of forestry investment at Savills, a property firm in the UK. “Investors capture this value either by selling the asset or harvesting timber.” While the timber industry is still recovering from the effects of the 2008 recession, demand predictions look positive for investors. Global consumption of industrial roundwood, or wood in its natural state, was still roughly three per cent below pre- recession levels in 2015, according to forestry investment firm FIM Services. Meanwhile consumption of industrial roundwood in Brazil, Russia, China, India and Indonesia increased by 39 per cent between 2005 and 2013. FIM’s Global Timber Outlook report also estimated global sawn wood consumption could rise by 39 per cent between 2015 to 2020 as developed economies recover from recession and timber consumption skyrockets in developing countries.
“With market volatility over the past few years, there are a lot of people who’ve decided they might like a more diverse investment portfolio,” says Raymond Henderson, says Raymond Henderson, a forestry expert at Bidwells, an agribusiness and property consultancy. “It’s not like investing in stocks and shares. There’s actually a massive chunk of solid land with trees growing on it, which a lot of people find quite attractive.”
One group of investors showing interest is high net worth individuals and institutions which place their money in private equity schemes in search of high returns. But the hunt for high returns inevitably means investors exposing themselves to greater risk. “Private equity managers have been promising and sometimes delivering 12 to 15 per cent annual returns,” says Olivier Lebleu, head of non-US distribution at Old Mutual Asset Management. “Then along comes forestry, which says: ‘You know, eight to 10 per cent is pretty good’. As the promise of private equity is shown to be a misery in terms of returns, people turn to other categories.”
Looking at unfamiliar investment categories is one thing but knowing how best to invest is another. “A lot of investors aren’t aware of forestry as an accessible asset class or how they would go about investing,” says Richard Davidson, fund manager at Gresham House Forestry, an asset management firm based in the UK. “Single investors might not have enough capital to buy a whole forest for themselves. Therefore the availability of forestry funds and different investment vehicles can make quite a difference.”
If an investor does have the funds and commercial woodland is available and in the right jurisdictions, simply buying a wood can bring tax advantages. Forest owners in the UK pay no capital gains tax for growing timber, for example and no income tax for selling it. They can also pass the land on to heirs without incurring inheritance tax. In France, forest owners are entitled to income tax deductions, depending on the size of their investment. One route to purchasing woodland is to liaise with timber investment management organisations (TIMOs), who act as brokers for forestry investments. But before buying, would-be forest owners looking for regular revenue rather than long-term growth in value should remember that only annual tree harvests – feasible solely on large tracts of forest – will deliver annual income.
The buy-your-own-forest option is not for everyone. Individual investors can put smaller sums into specialist forestry funds and can look to exchange-traded funds (ETFs), such as the Guggenheim Timber ETF and the iShares Global Timber and Forestry ETF, to gain access to the worldwide forestry market. Looking ahead, one of the most significant drivers of demand for forestry products are biomass fuel plants, which burn organic materials such as wood pellets and scrap lumber to produce carbon neutral electricity. Government policies are shifting in favour of renewable energy and in 2013, nearly two-thirds of renewable energy in the European Union was generated through biomass. The International Renewable Energy Agency estimates that by 2030, biomass could account for 60 per cent of total global renewable energy use.
So the future looks bright for the forestry sector but one significant question remains: where are the opportunities? While North America dominates the global commercial forestry industry, investments elsewhere are becoming easier to access. According to RISI, a global organisation with data on forest products, 40 per cent of the top 30 TIMOs are based outside North America, with 10 per cent in Brazil and three per cent in Asia. “Where to invest depends on your budget, objectives, attitude to risk, investment requirements and need for income,” says Adamson. “In the developed markets, we are likely to see some hardening of yields as the attractiveness of the asset class stimulates competition for property.”
So competition for investment-class forestry land is likely to heat up but perhaps the key concept here is one that is a watchword for professional and individual investors alike: a diverse portfolio. Investments in commercial woodland do not depend on favourable short-term economic conditions and so can be an excellent component part of an existing portfolio. A forest investment might not be as sexy as a bond issued by a disruptive tech start-up but the promise of stable returns and enduring value should be enough to turn many a hardened investor into a tree-hugger.
This story was originally published by Portfolio Magazine, Emirates' first-class passenger publication.