WHY INVEST IN UK FORESTRY?
Real assets, in the form of woodland, can offer many attractive benefits to investors including good investment returns, portfolio diversification, an attractive risk/return profile, serving as an inflation hedge and a substantial cash flow contribution.
Further, given its renewable nature and carbon-neutral footprint, the opportunity to provide ecosystem services (water, landscape improvements) and to improve habitats and biodiversity, woodland investment is attractive to those investors who place socially responsible investment and climate change mitigation high on their agenda.
UK Forestry can offer good investment returns
According to the Investment Property Databank (IPD), UK forestry has given higher investment returns than other asset categories over the last 10 years.
The annual return from a sample of private sector plantations of predominantly Sitka spruce in mainland Britain in 2015 was 10.8%.
Annualised investment returns (IPD, 2015)
|Asset Class||1 Year||3 Year||5 Year||10 Year|
UK Forestry has a low correlation with other asset classes
To maximise the risk-reward ratio of a portfolio, it is desirable to combine assets which have a low (or negative) correlation. Further details on Modern Portfolio Theory can be found at http://en.wikipedia.org/wiki/Modern_portfolio_theory
The 20 year total return correlation between UK asset classes is summarised below (Source: IPD UK Land Investment Briefing, May 2016).
20 Year total return correlation between UK asset classes and UK forestry
|Asset Class||Correlation with forestry|
There are two main reasons for this low correlation.
- Biological growth is not dependant on any aspect of the economy. Trees continue to grow regardless of the state of the FTSE 100. Further, there is some flexibility in harvesting dates so that in low price years timber can be left standing until prices recover.
- The total return for a woodland investment is dependent on the timber price achieved, which in turn tends to lag behind the economic trend.
Careful choice of a portfolio of woodland investments, including a diversity of species and age classes enhances this effect and improves portfolio diversification.
Forestry is an excellent hedge against inflation
The main expenditure for forestry investments is normally the purchase price, which is paid at the beginning of the investment. However, the revenue is generally received some time in the future.
As a result, forestry acts as a good hedge against inflation.
An introduction to UK Forestry as an investment is provided here.
A copy of our latest UK Forest Market Report can be downloaded here.