If You Go Down To The Woods, You'll Get A Big Return!

by Phillip Morton, Investors Offshore.com

03 July 2009

Investment returns from the tax-privileged UK forestry industry outperformed domestic commercial property and equities last year, producing a positive annual total return of 7.0%.

By comparison, UK commercial property delivered -22.1%; UK equities returned -29.9%, while listed property companies and trusts were the most vulnerable to the global market downturn, returning -46.6% over 2008, according to the IPD UK Forestry Index. Only bonds, which gained 15% in 2008, outperformed forestry returns.

However, the performance of the forestry sector remains significantly lower than the record levels seen in 2006 and 2007, when total returns of 20.6% and 31.6%, respectively, were achieved. The fall in timber prices, by 28.5% in the 12 months to March 2009 marking the biggest price decline in the last decade, was the key driver behind lower returns, IPD concluded.

Nonetheless, over a three-year annualized basis to end of 2008, forestry investment outperformed the three main asset classes, returning 19.3% per annum, while mid to long-term performance improved, returning 16.2% per annum in the five years to end of 2008 and 5.2% per annum since the start of the index back in 1992.

Simon Hart, a woodland investment advisor at UPM Tilhill, a sponsor of the IPD UK Forestry Index, said: “2008 was a tumultuous year for the global economy with major price corrections for many asset classes. However the value of UK commercial forests held and with very low leverage in the UK forestry market there was little evidence of distressed selling. Investors are seeing trees and land as a safe haven and retained their belief in the long-term fundamentals of forestry investment, despite the sharp fall in UK timber prices. The favourable tax regime remained unchanged during 2008.”

Income from timber sales in the UK is free of income and corporation tax and growing timber is exempt from capital gains tax. After two years of ownership, commercial woodlands qualify for 100% business property relief from inheritance tax.

The index series is based at 1992 after the expiry of tax relief on expenditure, which was withdrawn in March 1988 with a period of transitional relief until December 1992. The Index reflects movements in valuations driven by changes in the underlying long-term trend in UK timber markets and investor demand.

“Investors are taking a long-term view and demand for forest property has not reflected the fall seen in the timber market,” Hart added, concluding: “With uncertainty over the impact of quantitative easing on inflation and the value of paper money, investors are moving into tangible assets, such as land, timber and gold. There is much more caution in the market in 2009, but, providing there are no further significant falls in timber price, investor confidence should remain intact.”

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