Forestry – the ‘feel good’ alternative investment

There are many reasons why investors are increasingly looking to forestry, such as solid continuity and tax advantages, but could the main reason really just be that forestry is a ‘feel good’ investment like no other?

Investors crave continuity and forestry is one asset that represents that. The advantages of investing in the sector have not changed despite vast shifts in the environmental and political worlds in recent years. Future financial performance does not look as though it will be affected by any looming political clouds, while many Governments are hugely supportive of their forest industries and, as such, the investors. The long-standing tax advantages that come with investing in this asset class also look set to remain – something of vital importance to potential investors.

But overall, for many investors, forestry simply has that feel good factor. Planting new trees and supporting environmental growth is a positive move to make and it is this element of the investment that has seen direct investment into smaller woodlands across the globe, grow.

While investors in these smaller woodlands will not reap the same financial rewards as those who have injected cash into the large commercial woodlands, they will still enjoy the same feeling that they have done something positive for the environment. Many smaller scale investors also enjoy sharing these woodlands with friends and family, so are content to accept a lower financial yield as they derive so many other pleasures from the small investment. However, investors must be aware of the ongoing costs related to owning forestry as an asset class. For example, forestry investment made up of small woods needs public liability insurance as well as insurance cover for storm and fire damage. These costs are in addition to maintenance costs, covering issues such as thinning of tree cover and drainage work.

Forestry is an asset class that requires investors to be committed for the long haul – at least a decade if the saplings are newly planted and already growing, longer if not. Most investors are prepared to wait for the favourable net returns that look likely, without the stressful ups and downs of investing in certain other asset classes.

Recently, Boston-based asset manager GMO released a long-term forecast gain report as part of its regular seven year asset return predictions sequence. The report showed the importance of taking a longer term view when it came to forestry investment. It suggested that the returns to be found on timber were predicted to be higher than those relating to other asset classes. Forestry annual returns were tipped to average 4.8 per cent, in contrast to the annual returns expected on emerging market bonds, which were predicted to sit at 2.2 per cent. Indeed, the founder of GMO, Jeremy Grantham, classes timber as one of his favourite investments, the Financial Times reported.

“We’ve seen over hundreds of years that valuations are a good anchor for long-term forecasts,” Catherine LeGraw from the GMO asset allocation team, told the newspaper. “It’s a bit more mechanistic than a crystal ball. But you always have to test your assumptions and revisit your ideas.”

James Barrett of GWD Forestry added that the overall outlook for forestry is very strong. He advised: “Forestry investment is seen as being an extremely strong long term investment, as a direct result of the reliable returns and tax benefits that could be expected.

“It’s advisable that investors are careful not to lock up money they might need early access too because those who can afford to put money into longer-term investments will be much more likely to see them produce higher yields in most cases as their money, quite literally, grows.”

 

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