Forestry - The Green Investment
Those with long memories may remember that woodlands and forests used to be that low value, high maintenance cost asset only the wealthiest people could afford to own. Even the generous tax savings offered by HM’s government which included Inheritance, Capital gains and Income tax relief did little to persuade all but the most persistent.
Fast forward to today and even just travelling on a train we now hear phrases being used such as “climate emergency, Natural capital, rewilding and Carbon offsetting”. Those in the know probably realise that the new world is going to treat the owners and ownership of woodland and potential planting very differently. Indeed, since the end of March last year these phrases have become part of the modern language of the rural sector with COVID and global trade issues encouraging a surge of desire for woodland and planting land ownership comparable to the desire of people looking for a safe haven for their cash when they buy gold.
Where woodland investment wins hands down against traditional investments is that it is the only asset where you can lock cash that physically grows while you own it. There is some need for a forestry asset to be managed but this is relatively insignificant to the potential return on investment. Added to this, you can physically enjoy visiting your asset and even pitch a tent or shepherd’s hut in the middle of it.
Of most excitement is the potential for another busy period of woodland creation rivalling those of the 1960s, 70s and early 80s with aims for this creation often angled towards carbon offsetting and conservation, whilst creating timber income to provide a basis to the investment. If the current stampede towards planting land ownership by companies looking to invest early and offset their carbon emissions is anything to go by, we really are in for a solid period of re-afforestation in the UK. Every day Tustins is being contacted by a cross section of the business community who would like to respond to the governments’ net zero 2050 target and invest before carbon offsetting becomes too expensive. The UK governments see the potential that woodland creation offers with each of the devolved parliaments having seriously aspirational planting targets.
For many in the forestry and woodland world it is no surprise that the politicians have finally worked out that woodland creation could be a benefit to our economy by reducing the carbon emissions as well as the timber trade deficit we almost ignore. In the UK we currently produce between 20% and 30% of the timber needed to satisfy our annual demand. In fact, the UK is one of the largest importers of wood products on the planet. Given the world market for timber has serious supply issues with the amount of wood available from legal ethical sources becoming less each year, the UK is at the mercy of these turbulent markets. Without any new woodland establishment we will see a drop in the volume of timber harvested in the UK from 2030 onwards. Lower supply suggests prices will increase further from today’s values which are already 20-30% ahead of prices in early 2020.
How does this translate into the forest property market in the UK? Since 2002 we have been seeing the longest period of year-on-year forest property inflation. If you speak to some of our more traditional investors who have been used to sub-3% year on year returns on their forestry investments, the current return of between 10 and 20% looks rather impressive. No surprise, then, that the few properties coming to the market at present are achieving record prices.
Where you can add carbon offsetting as a new income stream to the cashflow, perhaps on low grade agricultural planting land (existing forests cannot be used to offset carbon emissions), we are seeing even stronger prices and competition for all but the poorest land. Who would have thought that plantable agricultural land would fetch in excess of £5000 per acre offered by forestry investors in stark contrast to the lower value of unplantable agricultural grazing land.
The multiple factors driving growth in the sector look promising, indicating a positive outlook for many years to come.