Forestry investment outperforms main markets for fourth year in a row

Written by Ray Clancy

Thursday, 08 July 2010 08:19

Forestry investment was the top performing property sector of 2009 returning 11.1%, compared to 3.5% delivered by commercial property, according to a new report.

The latest IPD UK Forestry Index shows that forestry assets have now out performed the main market for a fourth consecutive year. It says this reflects an increasing demand for land based assets and for timber.

The double digit annual return is an increase of more than 4% on the 7% total return seen in 2008. While levels are below the highs of 2006 and 2007 when returns were 20.6% and 31.6% respectively, last year’s 11.1% is the fourth highest annual return in the index’s 18 year history.

On a three-year annualized basis to the end of 2009 the total return was 16.1%. Over this period, forestry outperformed UK equities, fixed income and commercial property, which delivered returns of -1.3%, 6.9% and -8.0%, the report points out.

It also shows that timber prices fluctuated over 2009, reaching an annual low by September before rebounding in the final quarter, as indicated by a 6.6% annual price increase to March 2010.

‘Property prices are strongly related to long term timber prices, but do not necessarily follow directly, as this recession has shown. The turnover of commercial forestry property in 2009 was approximately £50 million. This was up significantly on 2008 and equated to some 14,000 hectares sold over 90 properties,’ it says.

‘At the start of the year there was some slight caution in the market, but that vanished as demand for forestry out stripped supply and forestry property prices rose. UK timber prices received by private sector growers have been more volatile than property prices with price fluctuations in excess of 20%, concluding in a significant net increase by the end of 2009,’ it adds.

Analysts say that timber prices are difficult to predict but the promise of renewable energy incentives, backed by climate change commitments, will increase demand for wood which will drive prices forward, but the role of currency exchange rates is also key.

‘With uncertainty over the level of future economic activity in the Eurozone, bold predictions of further timber price rises are hard to justify. Investor confidence in forestry is currently strong and that looks set to continue despite a far from certain economic picture,’ they conclude.

The IPD UK Forestry Index, calculated from a sample of private sector coniferous plantations of predominantly Sitka spruce across 140 forests worth £121.9 million, is derived from a series of annual valuations and cash flows.

Plantations in South Scotland delivered the highest return in 2009, at 21%, as well as over the three, five and 18 years to 2009, returning 20.9%, 20.6% and 7.7%, respectively.