Timing is everything: Maximising the exit return from forestry and farming
Through a combination of careful timing and our overall strategy of buying assets off-market and selling on, we’ve been able to deliver above target returns on forestry and farmland investments.
We all know that the surest way to make money is to buy low and sell high. The big question is how to make sure you are in the best position to achieve this.
Forestry and farming are at different points in the pricing cycle. But they both offer useful case studies on how we at Stellar Asset Management are able to acquire assets at the most favourable prices, raise valuations through active management and investment, and then sell at the opportune time.
Forestry: Capitalising on the bull market
Forestry is typically a long-term investment. While not as large as a proportion of our portfolio (less than 5%) as faster turnaround investments such as property development [link through], forestry offers an ideal combination of income, capital growth potential and non-correlated asset diversification.
We began building up our forestry portfolio in 2009 and on into the following decade. This was a great time to buy as timber and woodland sale prices were flat or falling. To further improve the favourability of acquisition prices, we bought off-market. In line with our overall investment strategy, we used specialist joint venture partners with close knowledge of the sector to help identify prime assets that would be available for private sale rather than having to pay a market premium.
Our partners then managed the forests on our behalf. Unlike some forestry investors, we take an active approach. We have planted higher yielding crops to improve revenues from harvested timber and appreciate the forests’ exit value. You cannot just sit back and wait for the returns. Woodlands require a great deal of tender loving care – frequent inspection, soil analysis, replanting and weeding. Without this, you can quickly lose stock through fire, disease and wastage.
By 2020, timber and woodland had begun to soar. Part of the rebound in investor interest and valuations stemmed from supply chain disruption and resulting timber shortages in the construction industry. Forestry is also on the investor radar as a source of woodland carbon capture, demand for which is rising exponentially as businesses seek to meet carbon neutral commitments.
With market conditions bullish, we moved quickly to capitalise by exploring opportunities for sale. Having bought privately off-market, we sold on-market, with the competitive tension 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. By the spring of 2021, we had sold eight of the nine woodlands in our forestry portfolio. We will continue to hold Panmure Forest in Scotland, our most recent acquisition in the sector, as there remains considerable opportunity to add value.
This speed of the divestment and prices we achieved highlight the strong interest in, and competition for, forestry assets at the current time. While good for us as seller, this makes us reluctant to invest in new woodland assets right now unless we can realise favourable off-market terms.
Farming: Successful sale bodes well for the future
We currently hold three farms in our agricultural portfolio, have sold a fourth in 2021. Like forestry, farming is a small part of our overall portfolio, though a useful diversifier and income generator. The long-term potential is significant as food manufacturers and retailers look to support local farmers, cut the carbon footprint in their supply chain and reduce reliance on imported produce.
For the past few years, farm valuations have been held back by shortages of labour and uncertainty over subsidies following Brexit. However, with new subsidy arrangements in the pipeline, the sector is beginning to turn the corner. The sale of our farm in North Runcton in Norfolk was secured at a considerable uplift on what we paid to acquire the property in 2015 [check]. The price was also some 60% higher than the most recent independent valuation in the months preceding the sale.
This excellent result bodes well for other farms in our portfolio. We will therefore review exit opportunities, though we may need to wait until the new subsidy systems beds down and prices in the sector become more favourable overall before we decide to sell. In the meantime, we will continue to boost revenues through diversification into crops such as oil seed rape and spring barley. We will also benefit from a successful application for grant money from the Countryside Stewardship Scheme.
Delivering for investors
Forestry and farming are examples of sectors that have faced challenging conditions in recent years. But they also show that with a clear and active investment strategy, careful husbandry and expertise on ground, the significant return potential can be fully realised.
In coming articles, I will be focusing on the value of diversification within our portfolio and how we achieve this. I will also be looking more closely at the thinking behind our investment philosophy, how this marks us out and how we go further in delivering the right outcomes for investors.
In the meantime, if you would like to discuss any of the issues raised in this article, please get in touch with one of our team today on 020 3195 3500 or contact email@example.com.
Written by Jonathan Gain
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 Kendal House, 1 Conduit Street, London W1S 2XA is authorised and regulated by the Financial Conduct Authority.