Money can grow on trees
In recent years, we have completed the sales of eight of the nine woodlands in our commercial forestry portfolio at well above target rates of return for investors.
But what makes forestry such a sound investment?
Proven tax-efficient asset class
If you do your homework and get your timings right, you can make money grow on trees. The double digit internal rates of return (IRR) on the woodland sites we sold attest to this.
Commercial forestry fits perfectly into our strategy of acquiring low risk, non-corelated assets with the potential for capital appreciation. The harvesting of mature trees also generates regular income from timber sales.
In turn, commercial forestry is a proven tax-efficient asset class for both private investors and business owners. Investments in commercial forestry qualify for Business Relief after two years. Timber sales are also free from income tax and capital gains tax.
The target return is a sustainable, through the cycle, 5% per year. Returns for investors on forestry and other asset classes are uncapped. This means that investors benefit from their rightful share of the kind of above target yields delivered through the woodland sales.
Investment security is provided by ownership of the freehold land on which the timber is grown. Forestry is one of a number of business activities within our overall investment portfolio. Others range from care homes to construction finance. The diversification across different asset classes limits concentration risk and helps to iron out market movements.
Buy low, sell high
Most of the forestry portfolio was acquired at a time when timber and woodland sale prices were flat or falling. By 2020, when we began to sell, valuations and investor appetite for forestry had soared, enabling our agents to quickly secure buyers at prices that exceeded our target return.
Indeed, in a number of cases, agents had already received approaches from interested buyers prior to the sites being officially put on the market. This highlights the strong interest in, and competition for, forestry assets at the current time.
The high prices for timber are clearly a factor in making forestry such a prime target for buyers. The prices reflect a surge in demand for timber and shortage of supply within both construction and DIY. The stable, long-term returns from forestry at a time of economic uncertainty are also appealing.
Further attractions include the opportunities for carbon offset through tree planting as environmental, social and governance (ESG) priorities move to the centre of the business and fund management agenda in the wake of the COVID-19 pandemic.
Drawing on specialist expertise
As with other asset classes, we use specialist joint venture partners with close knowledge of the forestry sector to help select and manage the investments. We set clear parameters for our partners in areas such as investment risk and target return to help protect the interests of our clients. Use of specialist partners rather than in-house resources also helps to contain fixed costs.
To provide further assurance, surveyors have been conducting an independent valuation of the woodland sites every six months, enabling us to gauge the movement on our capital investment, identify opportunities to add value and judge the optimum time to sell.
If you would like to know more about the woodland sales or other aspects of our investment strategy, please contact a member of the team on 020 3195 3500 or contact email@example.com.
Written by David Stein
Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.
Stellar Asset Management Limited of 20 Chapel Street, Liverpool, L3 9AG is authorised and regulated by the Financial Conduct Authority.