Why consider investing in forestry? We ask two experts… - YouTube

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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.

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