Why money still grows on trees
One more election and another jaw dropping result. In the past when faced with such uncertainty one reaction might be to reduce exposure to equities and shelter capital in cash. But with interest rates at 0.25% that does not look very bright, especially if inflation is on the rise thanks to a cheaper sterling.
A second reaction of mine was to bless my good fortune for being in the forestry sector. Land cannot be “quantatively eased” and the trees will keep on growing whatever happens in the short to medium term. That is not to say that forestry is immune to risk – timber prices fluctuate as with other commodities, but over the medium term it is unlikely we lose our appetite either for land or timber – which are the two elements of a forestry investment. As we still import around 75% of our timber requirements we can be pretty confident of selling our timber harvest, and the demand for timber as a fuel has revolutionised the market for small Roundwood.
The opportunity to invest in forestry in the UK derives from the time in the 1970s when the top rate of income tax was 83% with another 15% Investment Income Surcharge making a staggering total of 98%. It was possible to plant new forests and set the costs against your other taxable income enabling investors to develop these forests at a cost of 2 pence for every £1 they spent. Over a period of around 25 years around 2.5 million acres of new forests were established (the UK has around 57 million acres).
These largely upland plantations are the investment opportunities of today. The predominant species is Sitka Spruce which after 35-40 years may yield a harvest of perhaps £4,500 an acre (having cost about £1,500 to plant and establish). Whilst you no longer get tax relief on these costs the quid pro quo is that this income is free of income tax (and there is no Capital Gains Tax on timber gains either – if sold at an earlier point).
A full tree crop rotation is rather like a long endowment policy – save for the fact that most forests have a wide range of tree crop ages, which means income is likely to be generated more frequently and there is no need to hold the forest for a full tree crop rotation (the average period of ownership is probably 10-15 years).
This however ignores the main stimulus to forestry investment and that is its treatment for Inheritance Tax. The full value (land and timber) qualify for Business Property Relief after an ownership period of 2 years. This means the full value can flow from one generation to another without the 40% tax that would normally be charged.
Naturally a forestry investment does not suit everyone, but for those prepared to take the long view it is something that should be considered. Of course as with second homes the minimum investment required may be a deterrent as this now approaches £0.5 million but Stellar has funds that provide a means of investing into forestry at a much lower level.
Over the last 10 years forestry investors have achieved staggering returns of over 15% per annum according the IPD UK Annual Forestry Index (which is sponsored by Stellar Asset Management). I am much happier advertising the return since this index was launched in 1982 which is 9% per annum. During this time demand for land (agricultural or forestry) has soared as a scarce commodity, and market supply is much reduced. For the future I would promote returns of 5% pa (tax free) and hope owners get a bonus on top.
I am not sure that my postulations upon how forestry will perform in the context of Brexit or a Trump presidency carry much weight. If we get an infrastructural stimulus from Philip Hammond that should create additional demand for timber. If sterling remains at its current level, then this is a boost to our home industry as it will make timber imports more expensive. If the European Union imposes tariffs then good for British timber but probably not so good for GDP activity. As for Trump heaven knows, but at least the land will not dissolve nor will the trees stop growing!
Guest piece by Anthony Wyld, Forestry Investment Consultancy Ltd, for further details on how to invest in forestry please click here.