Woodland: Where money really does grow on trees
The UK woodland market
In a world of ever increasing awareness about the environment, carbon consumption, climate change and weakness in traditional asset classes woodland stands out on its own as a valuable investment. This is a point well understood by an increasing number of investors looking to get asset backed investments with long term stability and green credentials.
The figures speak for themselves. The IPD UK Forestry Index (www.ipd.com) tracks the returns from privately owned UK coniferous woodland. By the end of 2009 it reported annualised total returns of 16.1% over the previous 3 years and 8.1% over the previous 10 years. In comparison, equities showed -1.3% and 1.6% respectively, bonds were marginally better at 6.9% and 6.0% but both significantly lag the Forestry Index.
Further evidence of market strength can be seen in the 2009 UPM Tilhill & Savills Forest Market Report (www.upm-tilhill.com) which analyses the trading market for the year. In a turbulent year woodland property values dropped slightly but held up remarkably well despite falling timber prices. The long term picture is still showing growth with property values rising 126% from 2002, an average of 15% per annum and average values of £3,300/hectare (£1,335/acre). Values over the UK are variable by country, size of property and crop type; as can be seen from the report.
The forest industry relies on commercial woodlands and employed 42,000 people in 2007 producing over £2bn of added value from the forestry and processing sector (Forestry Commission 2009). By comparison the woodland property market is quite small at around £50 million per annum.
Market Drivers
The value of commercial woodlands is underpinned by its timber value, by this we mean the price paid to owners for their standing timber crop either now or at some point in the future. Once sold, the timber ends up at UK timber processing plants for conversion to higher value products. Properties are therefore typically valued by a cash flow derived from projected timber sales combined with management costs, grants and other income.
Timber values are in turn driven largely by the cost of import substitutions, when the pound is weak imports of ready sawn timber are expensive and the markets look for UK timber products. As the pound strengthens imported products gets cheaper and the UK timber price falls in an attempt to compete.
In a simple market, a property's value would rise and fall in line with timber prices. In reality other interests add value to a property as does an investor's view on future timber prices. A bullish investor will place a high value on the future value of timber to predict a higher return on his investment which enables him to pay more to purchase the property in today's market.
Timber Prices
The UK timber processing industry is well established and capitally intensive with billions of pounds invested already and more planned. There has been £1.2bn invested in Scottish timber processing capacity alone from 1980 to 2000 (Scottish Industries Cluster 2004). Without a domestic supply of round timber the industry would simply grind to a halt, this supports optimism on future timber prices and supports current property values.
Timber prices are tracked by the Forestry Commission (FC) who report their own average timber sale value (http://www.forestry.gov.uk/statistics). As the biggest single player in the UK timber market this tracks the trend in timber prices. In real terms the timber price now is ¼ of its historical high in 1987, see graph below. There is clearly a lot of upside potential.
Demand for Timber
Demand for timber is increasing along with the range of interests satisfied by woodlands. In particular, wood for energy is a massively emerging market with demand predicted to far outstrip supply. In Scotland in 2009 an additional annual requirement of 850,000 tonnes came on stream, this is about 10% of the UK's total annual cut. More is planned and the demand for wood fibre is predicted to rise significantly to 2025, principally due to the use of wood for renewable energy
(Wood Fibre Availability and Demand in Britain 2007 to 2025: ConFor 2010).
All this is along side the existing demand for timber: to feed into sawmills to make high value sawn products, to be chipped for making MDF and other board materials, to make fencing products, pallets and other small uses. It's no wonder that many processors are considering vertical integration by entering the woodland market to purchase growing stock for their own future use.
Other Interests
Demand is also increasing for timber as a means of carbon storage. Woodlands provide an excellent mechanism for individuals and companies wanting to reduce their carbon footprint woodlands.
Many people also want woodland for far more indulgent purposes, perhaps as part of a private shooting estate or for informal recreation and an escape from the busy world. These investors are typically more attracted to smaller properties especially in central and southern England where upwards of £10,000/acre is often paid for a couple of acres.
These small time investors have a disproportionately big impact on the property market below £200,000. Investors buy larger properties and resell them in smaller parts at inflated prices which pushes prices beyond commercial investors who want to keep the property as a whole and operate it on more traditional lines.
Taxation
Taxation on woodlands is very favourable and encourages investment into commercial forestry. A commercial woodland owned for two years will be 100% exempt from Inheritance Tax (IHT) at 40%. Now that the threshold has been frozen at £325,000 until 2015 commercial woodlands are more attractive than ever as a means of passing on wealth.
Timber sales are exempt from income tax. If an owner harvests £100,000 of timber from a property he pays no income tax on that income, to a 40% or 50% tax payer this is quite a bonus. Other income, e.g. from sporting rents, is taxable.
Captial Gains Tax (CGT) is not charged on the increase in value of the trees, it only applies to the underlying land. In many cases the underlying land is only a minor part of the value at purchase and does not increase because timber values go up so CGT liabilities can be very minimal. CGT liabilities can be rolled over into land purchased then planted with trees, this can absorb quite large CGT liabilities that then diminish as the property value transfers to the trees.
Obviously tax issues need specialist advice and are dependent on an individual's circumstances. The UPM Tilhill Woodland Taxation Guide 2010 describes the regulations more fully and provides details of advisors who may be able to help further (www.upm-tilhill.com).
Owning Commercial Woodland
Buying woodlands is much like buying houses. At below £100,000 properties are available but are usually unremarkable and are more likely to be for amenity than commercial purposes; below £50,000 and its hard to justify a commercial status. Once values get beyond £100,000 and head for £500,000 options are much wider and some excellent properties are within reach. Between £500,000 and £1 million (to £3 million maximum) there are far fewer properties to choose from but they can be of significant size and interest.
Unsurprisingly the commercial centre of the UK forest industry is in south west Scotland where growing conditions are excellent and land is available. This is also the focal point for the processing industry. North England and the Scottish borders are also important as is the west coast of Scotland and the uplands of Wales. If you are looking for purely commercial woodland these are the areas to focus on.
The Cost of Ownership
Purchase costs include Stamp Duty Land Tax (stepped, up to 4%), legal fees for conveyancing and agents fees (typically up to 2% of the agreed price). Once under ownership costs include insurance (covering property owner's liability and crop damage) at perhaps £500 to £1,500 per annum with management and routine maintenance adding a few thousand pounds per annum.
In many cases a management plan is required to obtain felling permission from the FC and to claim the necessary grants. Preparation of the plan is not too onerous but does require professional guidance and a one off cost.
Professional management of your property is a good way to demonstrate and ensure its commercial status. Forest managers like UPM Tilhill would be happy to quote for this service as would other reputable companies and individuals who can be identified through the Institute of Chartered Foresters (ICF) (www.charteredforesters.org).
Income from timber depends on sales going ahead as planned. The nice thing about woodland is that if the market is down an owner can delay sales for a year meanwhile his trees are getting bigger and more valuable.
Conclusion
Woodland is an asset class with a good deal going for it. It has significant tax benefits and it can provide long term security with an asset backed investment as well as enjoyment and green credentials. Does it get better than that?
Crispin Golding MICFor
Woodland Investment Advisor
Central & Southern England