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 ten years.
The annual return from a sample of private sector commercial plantations of predominately Sitka spruce in mainland Britain in 2017 was 13.9%.
Annualised investment returns (IPD, Results to December 2017)
|Asset Class||1 Year||3 Year||5 Year||10 Year|
|IPD UK Annual Property Index||9.6||8.9||11.0||5.8|
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.
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.