Money may not grow on trees – but it can be made from them and investors now stand a better chance of accessing their returns, thanks to an ever-expanding number of open-ended, closed-end and exchange traded funds (ETFs) that invest in timber.
For some time, timber prices have been on an upward trajectory, a trend many industry experts claim will continue in the medium term as the demand from developing countries, in particular China, increases. Constraints on the global supply of timber are also predicted to push prices higher.
According to the Forestry Commission, the average price of timber in England rose from £27.75 per unit in January 2005, to £39.50 in October 2011.
In the five years to March 16 2012, the FTSE 350 Forestry and Paper index has returned a whopping 298.94 per cent – more than four times the FTSE 100, which only returned 72.02 per cent in the same time period, according to FE Analytics.
With the UK’s obsession for green energy, this trend should continue, as the largest sustainable energy supply in the UK comes not from wind power, but from biofuels – one of which is wood, burnt as pellets or chips.
Climate change
Efforts to boost British forestry’s contribution to tackling climate change reached a key milestone at the beginning of March, as the amount of carbon dioxide predicted to be removed from the atmosphere by woodland planting projects registered under the new Woodland Carbon Code passed 1m tonnes.
Pam Warhurst, chair of the Forestry Commission, says: “The woodland carbon code is providing a boost in efforts to provide much-needed new woodland by giving confidence to investors that the project they invest in will ‘do what it says on the tin’. It also gives confidence to project promoters, who can now approach investors with credible, independent verification of their projects’ claims.”
As an investment, timber has certainly become more accessible to investors in recent years. Less than a decade ago, the only way for an investor to make money from trees was to buy forestry, but now, with 23 vehicles on the market, they can benefit from rising timber prices, without the added risk and responsibilities of physically owning the timber themselves.
In the three years to March 13 2012, timber ETFs made an average gain of 78.27 per cent, with the best performing, iShares S&P Timber & Forestry (DE), returning 85.62 per cent.
Open-ended funds appear to have done better, however, as the £149m Pictet Timber fund returned 108.82 per cent in the same time period, compared with the IMA Specialist sector, which made a gain of 56.04 per cent.
The manager, Christoph Butz, says that the price of forestry will appreciate as a result of significantly higher demand from Asian countries, a reduction in supply and new sources of demand through the use of timber in renewable sources of energy.
However, the fund made a loss of 1.34 per cent in the year to March 16 2012.
Bestinvest warns that the fund will have a high correlation to timber prices and, as such, there is a significant amount of single commodity exposure that will make the fund volatile.
Finally, investors can invest in timber through an investment trust. The first timber investment trust, which was launched on December 20 2006, Phaunos Timber, invests in a diversified global portfolio of timberland and timber-related investments. Year-to-date, the close-ended vehicle has recorded a loss of 5.8 per cent.
As well as providing a return on investment however, Simon Warne, tax partner at Crowe Clark Whitehill, says that investing in timber can also bring tax advantages.
“Buying a forest, directly or indirectly through shares in an established forestry investment company, can lead to major tax benefits. When a commercial forest, or share in one, has been owned for two years it qualifies for 100 per cent business property relief, which means it is also free from inheritance tax on death.
“In addition to this, the increase in the value of timber, but not the land, is exempt from capital gains tax. Income derived from cutting down and selling the trees is free from both corporation and income tax,” he says.
Nevertheless, sowing a seed of caution, Mr Warne says that investing in forestry and timber is best suited to the sophisticated and well-advised investor. He adds that direct timber investments require a large amount of capital.
“These types of investment should be seen as long term, as they run for a lengthy period and selling out early may, on occasions, prove to be difficult. It can also be expensive to manage it yourself, or indeed have someone do it for you. The difficulties and work involved in owning forestry directly has led to the establishment of other models, which offer certain investors the chance to buy a share of a fully managed timber investment,” he says.
“Choosing an investment in forestry solely for the favourable tax proposition should be avoided. It is equally important to consider the investment return qualities and a common case put forward to invest in timber is the simple fact that trees grow. In addition, there are no sudden new discoveries of commercial forests and, if prices are low, there is no necessity to harvest. Crop value is circa 85 per cent to 90 per cent of the value of a forest at maturity,” adds Mr Warne.
Simona Stankovska is features writer at Investment Adviser