The market in 2017 was characterised by a very ‘normal’ level of stock traded, but a sharp rise in the average price paid. There remains a general lack of high quality investment plantations being actively marketed and indeed, much of the recorded sales activity occurred late in the period. The appreciation in average price was considerable at nearly 20% over the year. Based on our longer term dataset, average productive values have increased by around 325% over 20 years, representing a compound annual growth rate of around 8%.

In the introduction we posed two questions; at around 8% why not trees and, how long can this performance continue?

Why not trees? This is not hard to answer as the case for forest ownership seems compelling and at the moment the asset class can appear to do no wrong – the main issue is difficulty in getting into the asset in the first place. The underlying fundamentals are based on the sustainable production of a useful commodity with monetary value against a back drop of a rising global population generating locked-in, long term demand.

In the UK this is coupled with a capital market offering investors a ready exit at any time, generating strong returns in a favourable taxation environment. Put simply, there should be a place for forestry in all well balanced real estate investment portfolios and there remains strong upside potential from rising timber prices.

Long term investment

Turning to how long can this level of performance (around 8% CAGR) continue and the answer is less clear. Investment theory suggests one of the key factors in investment performance is the position in the cycle at purchase. Forestry is a long term investment, and the market we are in at present has not really seen a downturn, as during the last period of deflation in capital values (late 1990s) there was not the mainstream capital market we see today. In the five years to 2002 the average value per hectare was £1,800, however in the five years to 2017 the same figure was £8,200 and so it is easy to see how high returns were achieved.

Forestry traditionally has a very low cash yield as the income is lumpy and irregular, whilst the costs of maintenance and management are annual. This means it is misleading to compare it with other forms of yield driven property investment where income flow is paramount. On the basis, therefore, that much of the historic performance is based on the change in average capital values, for the market to repeat this level of performance we would need to see a similar level of capital increase which would mean the average capital value would need to be around £28,000 per hectare by 2037. Whether or not this is achievable can only be speculation at this stage.

Short-term demand factors

We predict UK timber prices to continue to be dominated by short-term demand factors which look steady for the first part of 2018. The sustainability of timber prices is a consideration and over the medium-term the price of sawn wood must rise to support the current level of forest gate prices. Increasing demand from domestic house builders could provide the catalyst for this.

Supported by financial incentives, biomass uptake continues to provide increasing impetus to the industrial roundwood sector but we have some concern that difficulties in sourcing imports and strong marginal pricing has the potential to divert supplies of higher quality wood into biomass, which is not the best use of this material.

New planting remains an area of focus. 2017 saw some progress in England, and Scotland is now beginning to reap the benefit of strong Government support and a keen industry, however there is still much to be done in this sector.

The availability of physically suitable land at an appropriate price remains the biggest challenge. However, given the recent performance of forestry perhaps the question now should be ‘give me a good reason why I shouldn’t be planting trees next year?’