Why consider investing in forestry? We ask two experts…

Why consider investing in forestry? We ask two experts…


[Music] Hello, I’m Alex Davies,
founder of Wealth Club. Today we’re talking about forestry.
Family offices, pension funds, even the Church of England have been
investing for years, and experienced investors are also
increasingly drawn to it. The appeal is clear: you could
get tax-free income, and after two years your investment can
become free of Inheritance Tax. What’s more, forestry as an asset class
has outperformed stocks, bonds and property over the last ten years, although past performance is not a guide to the future. So what does investing in forestry mean, and
why could experienced investors consider it? Today I’m joined by two
respected forestry investors, Anthony Crosbie-Dawson of Gresham House
and Paul Atkinson of Par Equity, to learn more about putting your money
into this sector. So Anthony, who typically
invests in forestry and why is it such a
good investment? Our investor base ranges
from high net worth experienced individuals to family offices
to small institutions. What are they seeking? They
like the fact that it’s asset backed, it’s sustainable, so we are buying the land and the trees that are growing on the land. It’s delivered compelling returns and it’s
uncorrelated to mainstream listed bonds and equities, which makes it an excellent portfolio diversifier. Paul, do you see the same type of investors
looking for the same sort of thing? Completely, and adding
to Anthony’s points, in our case we’re a multi asset manager where forestry is one component of our funds but a very compelling component, and our investor base tends to be entrepreneurs who’ve been successful in building their
own businesses or people who work for large international companies, and the forestry
asset class seems to fit their interests very well. And why is it such a good
investment? Well, I think if you look at the financial returns – better than 9% over more than 20 years – very few asset classes would outperform that,
I’m sure Anthony would agree? Absolutely. But how do I go about it? Shall I buy
a forest – how can I get involved? You can buy your forest outright,
and it could be Alex’s forest, and the asset will be managed on your
behalf by an investment manager, or you can invest for a lower level of capital
in a diversified portfolio of forests spread geographically throughout the UK,
starting from about £100,000. How do you go about it? What, sorry,
what actually happens when I buy a forest, how do I
make money out of it? Ah, from – well, primarily from selling the
the trees, from chopping down the timber, and there is a wide range of end
users in the UK. So the timber that we are
dealing with is commercial conifers, so spruce trees, typically
spruce trees and these are being used for every purpose from building new
houses through to fencing, decking, right down to biomass for burning. And is there any other way
that I can make money out of it? Yes certainly, I mean what we look for
in a forest is a good element of capital growth and we look for some
additionality to the investment, so wind farms may be accessible for some
forest investments. Alternatively, we also do quite a lot— we buy quite a lot of
new planting land and that suits our particular investors who are looking to
shelter capital gains. All of which is underpinned by the
biological growth of the trees, so across an average 40-year rotation these trees
are putting on volume growth of about 5% per annum, no matter what
else is going on in the world – anything going on macroeconomically,
Brexit, Trump in the US, whatever it might be, the trees are still
adding volume and value. And in fact, in the last
financial crisis there was a flight to physical assets, particularly
forestry. And Brexit, I think, is if it is a hard Brexit it is likely to be good
for the price of timber and forestry in the UK. // And why’s that? // Well,
because a likely outcome is that sterling will be depressed, we’ll need to buy more locally
and the value of forest in the UK internationally will be higher
in Sterling terms. And what sort of age of trees are
you looking for, is there a perfect tree that you buy?
What do you buy? Within the portfolios that we manage,
we’re looking primarily for mature or semi-mature trees, being 20
years old and upwards, so we’re chopping the trees down when they’re about
35 to 40 years old, is when we’re harvesting them, so in order to pay our
investors an annual distribution we ideally would like to be harvesting in
some of our forests each year. So we need to be at the
upper end of the age profile. Where, typically, are these forests? Mostly in Scotland – they’re all UK based, the trees grow the best in Scotland, the soil is most conducive to quick growth, it rains a lot and as long as there is suitable drainage the trees
grow very well with these climatic conditions. And furthermore, proximity to market
means that you obtain higher timber prices. So the processing industry is centred around
northern England and southern Scotland. And Paul are you looking at
similar areas, and are you looking at a similar sort of age of a tree
– twenty years plus? So in general terms our investment thesis is very similar to Gresham, with slightly more focus on new planting sites, and
our investors are principally investing for capital gains reasons
rather than income reasons. So both investment theories are
very strongly supported by forestry; in our case, our emphasis
is slightly different. OK, and is there a specific type
of tree you would plant? Well, the main commercial crop is
Sitka spruce, and not only is it one of the fastest growing
and most viable crops but also it sinks more carbon than… so from an
environmental standpoint it’s actually a very valuable crop as well.
It is predominantly Sitka spruce but with any new plantation we also
make sure that it fits in with the relevant planning constraints in
terms of traditional forestry sitting alongside it and habitat for birds and
animals, and so on and so forth. And in fact the planning process
for new planting sites is very extensive and has to conform
to a lot of different criteria. Could I do
this myself? I think there will always be investors
who want to own their own forest, and are sufficiently wealthy to own
substantial enough assets for them to be economic. I suppose
investing with a manager like ourselves or Gresham, you are getting
a portfolio effect and you can invest at a lower level to get that portfolio effect,
but at a certain level some investors will always do
their own thing. We talked about Brexit and you said
it’s not a risk, but surely this… Most of my investors, when they first
hear about forestry, they sort of automatically assume it’s incredibly risky.
So what are the risks, what could go wrong? The main risks are insured against
– so, fire damage, and… although going back to how wet most of these sites are,
fire actually is rarely an issue. What is more of an issue is wind, so these
are upland sites, so in high wind speed winters, particularly if you get over
100mph winds on the west coast of Scotland, for example in Argyll,
you do get trees damaged by the wind and you can insure against that, and we
have a bespoke insurance policy for our investors. But actually by the time the
trees are mature the salvage value of the timber is such that the insurance is
not required, and we don’t insure from 35 years old and above, because we can sell
the timber if it’s blown down, there are just slightly higher working costs
for the timber buyer which is reflected in the timber price, but it still has a
value and gets processed in the sawmill. And if it gets diseased you can still
cut it down and use it very quickly? You can, yes. There is no
known disease that commercially affects Sitka
spruce trees, so you can’t insure against that, but again a way to
manage that risk or mitigate it is to invest in a diversified portfolio of
forests rather than a single asset. But in fact recently we had a forestry
site quite close to an area where there’d been larch dieback disease, and we
just felled the forest and we actually got a very good commercial return from the
timber we took out as a result of preventatively felling some trees
because of that disease. But, as Anthony said, Sitka spruce is
really not prone to disease risk so far. It’s fast-growing, it’s vigorous, and the
larch trees are not mature till they’re 70-odd years old, so this species,
Sitka spruce, is only half that rotation before being mature,
it‘s less susceptible to disease. And if the economy collapses again – so
let’s look actually, what happened in 2008/2009, what happened to
forestry as an asset? Well the timber price did indeed
collapse in 2008-2009, primarily because construction fell off a cliff – people weren’t building new houses and demand for timber, as for all other commodities, plummeted. But the interesting aspect of
2008-2009 from a forestry perspective was that, in spite of the timber price
collapsing by about a third, the actual asset values continued to rise as people
demanded real assets, and so there was a flight from risky equities to actually
land backed assets such as forestry So let’s have, let’s suppose there’s
another recession, which there will be at some time, maybe that
won‘t happen, maybe the price of land has already gone up as much as it can,
what would happen, what do you do? Paul, what would you do with all
these trees sitting there waiting to be harvested but no demand,
what happens? It’s kind of – I think, globally, it’s hard
to see a situation where there’s no demand, given the way that demand
for natural resources is running. The growth in world population, the growth in building, so… and any previous downturn has been relatively short in the lifetime of trees, you know, you’ve got up to a 15-year felling cycle, we just leave
the trees in the ground until the market comes back. There’s no requirement
for you to fell that particular year or the following year, unlike say wheat or
barley or a traditional arable crop. That’s absolutely one of the main
advantages of forestry, particular as a biological crop, that it’s not beholden on
their owner to harvest every year if prices are depressed. We leave to add
volume and value on the stump. So Paul, quite a few of
our investors ask us about the sustainability of forestry as
an investment. How sustainable is it? I think there are a number of points here
which are relevant. The first one is that in the UK environment
all the forestry assets are regulated, it’s a highly regulated
industry, unlike some parts of the world, which means that when we fell
trees in the UK we have to replant. And in fact in our case we’re planting more
new trees than ones we’re felling. The second thing is that forestry as an
asset class is an important part of the commitment to the climate change agenda.
We plant the trees, they grow quickly, they sink lots of carbon. And that’s
important in terms of the UK’s commitment to
the climate change situation. I agree with all that and,
exactly the same with Gresham House managed forests, for every tree that we’re harvesting we’re
planting another 2 to 3 trees within a year of harvesting, so it’s
100% sustainable. Paul, can you just sort of go
through, I think we know the tax benefits are hugely beneficial for individual investors,
can you just walk me through those? Sure, you know there’s no – after
holding the asset for 2 years or more – there’s no inheritance tax
on the asset. There’s also no capital gains or income tax
on the growth in the timber. There may be some capital gains on the
growth in the value of the underlying land, but in
relation to the growth in the value of the asset you’re buying, that’s
relatively modest in comparison to the growth in value of the trees. And for those
investors who are investing in new planting sites where they can actually shelter
capital gains as well, if they’ve sold their business recently or whatever. So
the tax benefits are pretty compelling, the financial returns are
very compelling over a long period of time, so it’s hard to look past it as
an asset to sit alongside other assets. Our investors tend to be investing in
multiple asset classes and forestry is certainly one of the components they
look at as being an attractive part of that
portfolio effect. If I wanted to invest in
forestry, what typically would I need to invest? What’s the minimum
that I want to get involved? Well for buying an asset outright
and being Alex’s private forest, you’d be looking at about
£2 million+, but for an investment in a fund which owns
multiple forests throughout the UK, the minimum with Gresham House is
just under £100,000. You’ve got the government
always meddling, trying to remove various benefits – is there any talk of
actually these benefits going on forestry? No talk that we’re aware of, and in
fact rather the opposite to that; politicians of all parties are keen on encouraging more trees to be planted, forestry is a rare economic success story in many upland parts of rural Britain. It employs 40,000 people
throughout the UK, 25,000 of those who are in Scotland, so the political will is
very much supportive of forestry. So never say never,
try to predict what politicians may or may not do, but
certainly there is no indication that any of the tax
advantages are to be removed. To that point as well, I’m sure
Anthony will agree that if you look at the level of capital assets in forestry terms
that change hands every year, and then say well, what happens if the tax break disappears? The amount of extra tax collected really is not very material at all, and probably hardly worth the change, if you want to incentivize people to invest in what is
a very important asset to the UK economy. And would you personally invest in it, Paul,
without the tax benefits? Probably, yes. Clearly with the tax benefits it’s making it
a very popular investment, are both of you– is it hard to find
forestry assets to purchase at the moment? We are limited by the size of
the UK market, turnover in value terms is £100–150 million per annum.
We are seeking to increase that by purchasing upland areas, sheep grazing
typically, to be planted with commercial conifers. That is our strategy in terms of
either identifying assets that are slightly sub economic and
need some work doing to them to make them more economic, or buying
new planting sites where there’s not as much competition, and you’re dealing
directly with the farmers who are selling the land. And let’s imagine I’ve got
£100–200,000 to invest, slightly older than I am – I’ve got
all these other places to put my money, why should I put my money in
forestry? First off, Paul… Well, firstly there’s no
inheritance tax – pass it on to your children
free of inheritance tax. But if you look at the performance
over time, it’s an important, I think an important part of a portfolio.
And then many of our investors at my age are investing in forestry as
part of their pension planning – not inside a pension fund, outside their
pension fund – so they’re getting capital gains tax free return
against £1 million-capped pensions. I agree with all of that and
would just add the diversification benefits within an overall investment
portfolio, the lack of correlation with mainstream assets makes forestry
appealing on that front, and then you’ve got the biological growth underpinning
the whole investment. Anthony and Paul,
thank you very much. Thank you. [Music]

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