Forestry sector still eyes growth

Published on Thursday 27 November 2008 20:31

INVESTING in forests and trees in Scotland has delivered lucrative returns as one of the most old-fashioned of assets starts to look more appealing in the face of falling markets and a recession.

While more common investments such as equities plummet, and even "safer" assets such as government and corporate bonds lose their shine, the value of commercial woodland has grown by between 125 and 150 per cent in the past five years, according to research published yesterday.

The Forest Market Report from UPM Tilhill, one of the UK's largest forest management companies, and property firm Savills finds prices of commercial forests have gone up about 100 per cent over the past five years, plus an average 4 or 5 per cent compound annual growth in the value of the timber.

In 2008, while property assets continue to fall, like-for-like prices of commercial woods increased by 10 to 20 per cent.

Unfortunately for investors about to rush in, this growth is due to slow down. Driven largely by a boom in housing, which has since collapsed, the value of forest land is associated with the rising price of timber. But the housing slump has seen that value fall by 25 per cent. Stuart Goodall, chief executive of the Confederation of Forest Industries (Confor) said the industry was facing pain along with most others.

"It will have a short-term impact, there is no doubt about that, but the underlying fundamentals are very good," assured Goodall.

Simon Hart, woodland investment adviser for UPM Tilhill, said that although the price of timber has fallen, the value of forests has remained steady. "The price of timber has fallen as a result of the fall in house market activity. What we have not seen so far is a fall in the value of the freehold," he said.

The upside to the collapse in demand for timber for forest investors is that there are other markets on the rise – including a small but growing demand for fuel to burn in biomass energy plants, such as those in Shotton, Teeside and Lockerbie.

Ewan Berkeley, head of investment and valuation at Savills rural arm, said there were reasons to remain "reasonably optimistic. Energy is providing a new demand for timber. That is not going to improve the log price, but it will improve the price of lower grades of timber. It will underpin the price."

Nevertheless the overall market is small. Last year, sales of forests in the UK came to 24.4 million, driven largely by private UK investors attracted to the generous tax benefits unique to forestry.

"Institutions are reluctant to invest in small markets by and large that is why most involved in foresty as an investment are private investors. It is a fairly small market," noted Berkeley.

BACKGROUND

TAX breaks for investors in forests can be very impressive. Commercial woodlands are 100 per cent free of inheritance tax and there is no income tax on the sale of timber. Felled timber is also free of capital gains tax.

Tax breaks on forests, however, bring back bad memories for many in Scotland. During the 1980s, people on high incomes could offset tax on forestry expenditure.

This resulted in rich landowners and celebrities such as Sir Terry Wogan planting vast areas of sitka spruce and lodgepole pine that scarred the internationally famous peatlands of Caithness. The tax wheeze was repealed in 1988. Simon Hart, of UPM Tilhill, said: "We kind of regard that as ancient history, but it is a lot of what people know about forestry – people say 'Terry Wogan'."

Jamie Farquhar, Confor national manager for Scotland, said: "The taxation treatment of woodlands is very beneficial, and rightly so. We always argue for stability in anything like this, otherwise we will not be able to encourage a longer-term view."