Forestry returns outperform the rest over three years, says IPD

Investment in forestry outperformed domestic commercial property and equities last year, producing a positive annual total return of 7.0%, eclipsed only by bonds, according to the IPD UK Forestry Index.

By comparison, UK commercial property delivered -22.1%(1; UK equities returned -29.9%(2, while listed property companies and trusts were the most vulnerable to the global market downturn, returning -46.6%(3 over 2008. Bonds, however, gained 15%(4

The performance of the forestry sector remains significantly lower than the record levels seen in 2006 and 2007, when total returns of 20.6% and 31.6%, respectively, were achieved. The fall in timber prices, by 28.5% in the 12 months to March 2009 marking the biggest price decline in the last decade, was the key driver behind lower returns.

Over a three-year annualised basis to end of 2008, forestry investment outperformed the three main asset classes, returning 19.3% per annum, while mid to long-term performance improved, returning 16.2% per annum in the five years to end of 2008 and 5.2% per annum since the start of the index back in 1992.

The divergence of returns, between best and worst, was pronounced on a three-year time horizon to end of 2008, with the top 5.0% returning 35.2% per annum while the bottom 5.0% returned 0.0% per annum. Over the long-term, the gap has started to widen and over the 16 years to 2008, the top 5% returned 9.2% per annum, while the bottom 5.0% just managed to produce a positive return of 0.2% per annum.

Simon Hart, a woodland investment advisor at UPM Tilhill – a sponsor of the IPD UK Forestry Index – said: “2008 was a tumultuous year for the global economy with major price corrections for many asset classes. However the value of UK commercial forests held and with very low leverage in the UK forestry market there

1. Source: IPD UK Annual Index 2008
2. Source: FTSE All-Share Index
3. Source: FTSE All-Share Real Estate Ind
4. Source: FTSE UK Gilts Index 5-15 yrs

was little evidence of distressed selling. Investors are seeing trees and land as a safe haven and retained their belief in the long-term fundamentals of forestry investment, despite the sharp fall in UK timber prices. The favourable tax regime remained unchanged during 2008.

“The volatility in the timber market has not been reflected in freehold commercial forest values. In most situations, when forests come to the market, felling can be delayed for five or more years, and for many felling may be 20 or more years into the future. Investors are taking a long-term view and demand for forest property has not reflected the fall seen in the timber market.

“With uncertainty over the impact of quantitative easing on inflation and the value of paper money, investors are moving into tangible assets, such as land, timber and gold. There is much more caution in the market in 2009, but, providing there are no further significant falls in timber price, investor confidence should remain intact.”

source : IPD