Forestry along with farmland has outperformed most other assets during the past 20 years. Forestry, according to IPD, and top quartile arable farming have recorded annualised total returns during this period of 9.2% and 11.8% respectively.

This is comparable to alternative assets with commercial property, equities and gilts recording annualised total returns of 8.7%, 7.5% and 7.5% respectively. The exception was residential property where annualised performance over the past 20 years was 13.1%. However, the recession had less impact on rural assets (farming and forestry) and these have outperformed over the past 10 years.

Economic pressures

The investment performance of these forestry and farming assets in GB is mainly driven by capital appreciation rather than income return. The growth in farmland values tends to be more recession proof than forestry.

Forestry is more exposed to economic pressure due to its close relationship with timber prices and therefore the prosperity of the construction industry. However, as Graph 6 shows, the recovery in forestry values has been significantly stronger than alternative assets.

click image below to enlarge

^{Source: Savills Research}

Forestry, and indeed farmland, are assets which are ideal for diversifying investment portfolios, as they both have a weak correlation with other real estate and the stock market and therefore allow risk to be spread across the total portfolio.

It should also be mentioned that both assets are suited to medium and long term holding to reduce the exposure to climatic and price volatility and, as noted in this report, the forest growth cycle.

Tax and Risk Mitigation

Commercial forestry has long been seen as a tax efficient investment, with the fiscal policies of successive British governments since the 1980’s having a greater influence on woodland values than timber prices. Income Tax relief on forestry planting expenditure in the 1980’s fuelled investment in woodland creation, whilst shelter from Inheritance Tax has been of primary importance since the 1990’s.

The tax benefits of commercial forestry remain. Income generated from the sale of timber is exempt from Income Tax and Corporation Tax, making forestry an effective means of converting capital into tax free income. Commercial forestry also qualifies for 100% Business Property Relief once held for two years, so that if held at death there is no Inheritance Tax payable on the total value of the land and the trees.

When the global financial crisis struck in 2008, we saw a surge of interest in the sector, with investors turning to forestry as a low risk asset to see them through the recession. At the time, few can have expected to benefit from the strong capital growth we have witnessed.

As the economy recovers and the price of timber rises, we are seeing timber income potential overtake tax shelter as the primary driver behind forestry investment. This can only be a good thing for the wider industry.

Like any investment, forestry sits best as a part of a balanced portfolio of other assets. Risks specific to forestry are best mitigated by creating a woodland portfolio of mixed age structure, spread across different geographic locations. Like any commodity, timber prices can be volatile, but in the event of a significant price drop forestry provides the opportunity to delay felling and ‘bank it on the stump’ effectively holding value as stored capital until such time as prices recover.