Forestry as an Alternative Investment
Introduction to Forestry
Forestry projects can be opportunities for green, ethical, socially responsible investments. It’s very easy to find information about the destruction of the planet’s forests and the damage that is doing to bio-diversity, robbing indigenous people of their homes and contributing towards global climate change. For investors who are concerned about this, an investment into forestry is one painless way to take action.
Brilliant Diversification Tool
Like gold, one of the major benefits of investing in forestry is that it is “counter-cyclical.” Basically, if you invest in forestry then whatever happens in the wider economy, your wealth is still growing because your trees are still growing. This makes trees a great inflation-proof store of wealth and means that even if the economy is in a downward cycle and other investments are performing poorly, forestry should still be earning you some returns.
It’s also an extremely flexible investment in terms of inventory – if the market price is too low one year, it is possible to leave the trees standing and not only is there no storage cost, but the amount of timber harvested the following year will have increased. Being able to diversify away from property and more commonly held assets reduces risk and is one of the key benefits of alternative investments.
Why Invest in Forestry?
Global Demand for Raw Materials
Like all commodities, the demand for timber is supported by the growth of the world’s population and in particular the strong growth in China and India. Annually, China consumes over 150 million and India consumes over 64 million cubic meters of timber. Both of these countries are already importing large amounts of timber to meet this need and as their middle classes grow and their spending power increases this demand will also increase. In addition, the growing requirement for wood chips as a renewable fuel source will also support timber prices.
This is a compelling and convincing backstory that stands up to scrutiny.
As well as being a great store of wealth, protection against inflation and diversification tool, forestry has been a consistently strong performer. Forestry investments showed an average annual return of 14 per cent between 1987 and 2008, (according to the US National Council of Real Estate Fiduciaries) and from 1972 to the present day has produced annual returns of 11%. This strong showing has continued throughout the recession – the chart below shows the performance of Timber and Forestry over the last two years. These returns should be attractive to any client in todays’ climate.
Forestry investments can have superb tax advantages, but of course every investor’s tax situation is different and they should be certain to take their own independent tax advice:
Inheritance Tax: After two years of ownership, commercial woodland qualifies for 100% Business Property Relief no matter where situated in the world, allowing 100% Inheritance Tax relief. This is of course key for investors who are looking for tax efficient ways to pass on their wealth
Capital Gains Tax: There is no capital gains tax due on any rise in the value of the trees. You could be subject to capital gains tax if you own the land the trees are planted on, but if the land is leased there is no direct ownership and no Capital Gains tax to pay.
Income tax: UK Income tax is payable once the trees are felled and you take your profits. You can offset your costs against the tax bill. If you have invested outside the UK and already paid income tax in the country where the forest is located, there may be a dual tax agreement with the UK – so you only have to pay income tax once. This is the sort of fact checking that should form part of your due diligence.
By investing in forestry, investors are helping to preserve one of the earth’s great natural assets. Forests are our biggest carbon sinks, absorbing carbon and helping combat climate change. They also harbour over 50% of the world’s plant and animal species, preserving bio-diversity. This green halo has a strong appeal to many investors.
What’s the catch?
By its very nature, forestry is just about the most illiquid investment you can make. Investors may see interim returns when plantations are thinned, but the real profit is once the fully mature trees are harvested – which can be 10 or 15 years after the initial investment. So this might be perfectly suitable for investors looking to diversify and preserve wealth in the long term, but it would not suit somebody trying to save for a deposit on their first home for example.
And as always, it is a case of buyer beware: undertake thorough due diligence and be sure to fully understand the investment proposition before you begin selling it to clients.
What to look out for
• Research the land ownership. Project owners should be able to demonstrate un-contested, clearly defined, long term land tenure lease rights
• Ensuring that there is an independent investor’s agent in place to act on the investors behalf in the event of a default or if the product provider ceases trading. It’s important to avoid the situation where an investor is left holding a small and relatively worthless parcel of land in a far off country. An independent agent would act on behalf of all of the investors to sell all of the available land and use the proceeds to repay investors.
• Ensure that the trees are insured or as a minimum the company provides a replacement guarantee for lost trees.
• Look for projects that are certified by the Forestry Stewardship Council (FSC) or similar – this is an important seal of approval for the way the project is being run and helps to guarantee that it is a genuine green, ethical and socially responsible investment
• Does the project qualify for carbon credits? Not only are these another source of revenue, they are also third party verification that boosts the project’s green credentials.
• Forestry has a strong green halo and is an ethical and socially responsible investment – provided you choose the right project
• As an alternative investment that is not correlated with more commonly held assets, forestry helps investors diversify and protect their wealth
• Forestry has a strong track record of performance
• Forestry investments are long term, illiquid investments