Growing strong: the role of forestry in a balanced investment portfolio

A long cycle product like timber typically requires capital appreciation to counter a “lumpy” income profile, and the strong returns posted over the 20 years to 2022 saw inflation in average values of around 1600%.

2023 countered this trend and despite hopes of a recovery, 2024 was similar with limited transactions in a slow market, despite more stock. Transactions of investment grade assets only aggregated to £103.8 million, well below the 10-year average of £157 million. As expected, the majority of activity was in Scotland.

The result of the quiet conditions was a further fall in the average prices achieved in completed sales over the year, reducing the average price to £21,600 per net productive hectare. In context, this figure was down at £1,600/ha in 2002 and up at £28,000/ha in 2022.

Buyers continue to remain cautious, but the fundamentals around timber investing are actually very strong. Timber is seen as a key construction product in low carbon buildings, forest investing is seen as sustainable, and there is high expectation that owning forestry will allow investors to access developing nature recovery markets.

Forestry in the UK: timeline of a relatively new market

The UK differs from many of the world’s forest investment regions as all of its traded property is plantation forest, mostly all planted after the second world war. As such, the market is still relatively immature compared to other countries across the globe where forest resources date back centuries, or the trade is in virgin forest.

As much of the UK’s 1970s and 1980s planting developed towards maturity, there was strong growth in asset values over the 20 years up until 2022.

As mentioned above, the market established from a very low base and interest was driven by a number of factors including the capital tax benefits of forestry which were deemed to be beneficial, and which were important to early adopters.

Investment in sawmills and wood processing capacity didn’t begin at scale until after 2000, coinciding with the maturing forest resource. This provided state-of-the-art markets for UK timber and led to a period of timber price improvement.

Forestry also offered an alternative investment for cash and that was a very important driver in the market, especially after the 2008 financial crash and the low interest rates that followed. Forestry offered a comparatively high yield, attractive in a low interest rate environment.

Supply was very consistent for 10 years leading to price inflation, but in 2020 and 2021 capital values surged. Then, over the course of 2022, there was a rapid slowdown in activity when interest rates shot up after the Autumn Budget, and the market in 2023 and 2024 was influenced by the subsequent higher costs of capital. 2024 also saw a general election, and an Autumn Budget deemed largely negative towards UK land also gave buyers and sellers reasons to be inactive.

Taking the long view

Owners are, however, confident prices will recover and, as forestry is not an asset that requires short-term thinking, most will sit it out. This does limit stock coming to market and it is likely to take some increase in the pace of completed sales to see more willing sellers emerge.

If interest picks up and new stock comes forward, we still do not expect a return to the soaring values seen in the early part of this decade but do see scope for solid capital appreciation over time, especially if the macros around timber utilisation start driving global timber prices. 

Positively, it’s worth noting while values of good quality commercial forestry are down 25% on where they stood 24 months ago, values had doubled over the course of the preceding three years – so over a five-year period they still look solidly up and very good.

The current slower performance of the forestry market is not limited to the UK. Wildfires and the effects of climate change have been problematic in the Americas and Australia – and there is some nervousness among investors about the increasing impact these may have.

Regulation around investment from other countries, which controls who is permitted to invest, is also a factor, with New Zealand mindful of China and many European states having ownership requirements.

But despite this, the fundamentals are sound and interest is there. More pension funds are eyeing up forestry, for example, as it provides capital on the balance sheet to counterbalance more risky investments and assists in corporate social responsibility requirements too.

The key is patient capital and to set your investment horizons over the life cycle of the trees you are growing. Money doesn’t grow on trees, but as part of a balanced investment portfolio they surely help.

Further information

Contact James Adamson

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