UK forestry ‘outstrips other investments’

Forestry investment in the UK has been performing particularly well recently with recent data revealing the extent to which this alternative asset has outstripped other investment vehicles.

The latest IPD UK Annual Forestry Index sampled 133 commercial forests in Britain and found that they offered average returns of 18.4 per cent in 2014. Looking back further across the last three years and the returns are even higher, averaging 21 per cent a year since 2010.

Across the same timescales, the FTSE 100 share index returned an average of 7.7 per cent and commercial property investments averaged 10.9 per cent.

Much of the increases in the UK market have been driven by high levels of competition for the limited resource that is investment grade forestry. Wealthy families and funds are keen to get their hands on fertile land and invest in a long-term plan of return, either for themselves or their heirs.

Competition for land and plantations isn’t showing any signs of abating either, as Alastair Sandels of Fountains Forestry, a forest management company, told The Economist: “Britain doesn’t have anywhere near enough trees in the long term to keep up with demand. Over half the country’s timber is imported.

“The Government’s Forestry Commission last year warned that supplies may start to decline from around 2030 because not enough new forests are being planted. Bad news for squirrels, but good news for forest owners.”

Global forestry investment

Britain’s lack of space is heightened by its small landmass but restricted space for new plantations is a problem across the world. From an investor’s perspective, however, it’s a problem that could prompt higher returns from existing forestry investments as the cost of land purchase rises.

It’s an issue that is starting to impact Latin America, an area that tops private sector plantation investments.

Sustainable forest management requires between $70 billion and $160 billion in investment. While current investment levels across the globe are falling short of this requirement, pockets of forestry are receiving healthy levels of finance from investors as they recognise the potential inherent in specific regions.

Latin America is topping their lists with the region drawing the most private forest investment – 83 per cent of the global total or $1,464 million, according to Profor.

Brazil receives a massive 80 per cent of the investment in Latin America.

Returns and risks are driving the decisions among investors regarding where to put their money. Profor cited the following as major influences: tree growing conditions, access to markets, growth potential, physical and institutional infrastructure, and the business environment – including political and economic stability and security of land tenure.

Some of these factors can and are being influenced by governments and it’s a testimony to Brazil that the country has created such an attractive investment opportunity.

Global balance

The global forestry industry can now look to recreate Brazil’s success story, building forest sector transparency and improving infrastructure to enable more productive and effective use of private investment in the area.

One key angle in this will be to develop industry standard reporting. At one end, this will involve collecting and improving access to information around the availability of suitable land for investments, growth and yield, growing conditions in general and broader risks.

But to really keep the industry moving on a global scale, Profor and others are calling for reforms of the policy and legal approach to forest investments in order to clarify the role of the private sector and create a framework within which investment can be promoted and targeted to best effect.

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