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Investing in Forestry Assets – why invest? What are the benefits, risks, and ways to go about it? - YouTube
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Hello I’m Alex Davies, founder of
Wealth Club. Today I’m with
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Paul Atkinson of Par Equity to talk
about investing in forestry assets.
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Why should experienced investors
consider investing in forestry?
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I think there’s a few good reasons.
One, the historic long-term returns
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in forestry have been extremely good.
At one point there was an independent index,
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IPD index, which showed 9.2%
[annualised total return] over 25 years.
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More recently I think it’s been slightly
better than that. It’s also completely
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uncorrelated with other capital markets,
a pretty good hedge against inflation,
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and of course at the moment there’s
increasing interest in the asset class
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because of the climate change,
carbon sequestration and other factors.
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It’s also very tax efficient isn’t it?
Can you tell me about that?
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It is, yes – so there’s no capital gains
on timber, although there is on the
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underlying land, and there’s no
income tax on timber assets being sold,
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and there’s no inheritance tax after
holding the asset class for two years.
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So a lot of investors in forestry are
looking into it as inheritance tax planning.
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And who typically
invests in forestry?
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Typically, it’s high net worth
investors – professionals at the
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top of their careers, partners
in law firms and so on,
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and wealthy business families, and some
smaller family offices. But we’re also
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seeing increasing investment from
financial institutions now.
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And also companies, as you’ll see
with the recent acquisition
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by Brewdog of the site
at north Lomond.
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And how do investors
make a return?
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Well, first they make a return from the
felling of forestry and selling to the market.
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Earlier in the forest’s lifetime we also
do some thinning, which produces
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some modest return. Obviously the
sale of capital assets, either at the
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end of the fund life or during the fund’s
lifetime, which will be free, largely
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free of capital gains tax. And then
there’s additional returns, potentially,
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from things like selling
woodland carbon credits,
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there’s a potential development upside –
hydro, peatland restoration, and so on.
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And forestry’s had a very strong
number of years performance,
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what’s driving that return?
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It’s a combination of demand for timber
for construction, and globally that’s
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increasing. Of course there was a bit of
an abeyance during Covid lockdown, but
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the resurgence has come back with the
demand. Long-term demand for timber,
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everyone’s saying that’s going to continue,
more and more timber being used for
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construction. You’ve got more and more
uses for the forestry product itself,
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and more and more institutional interest.
And finally carbon, and carbon credits
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is now a key factor in terms
of driving returns, we believe.
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And what do you mean by carbon credits –
how does that work, how do you make money?
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So when you buy a new planting site,
you have the opportunity to register it
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for woodland carbon code credits.
On day one you’re offered what are called
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provisional units, and there’s an audit
five years in, then ten years in,
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and a further ten years in. And over
that time period you’re allocated
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carbon credits related to the amount
of carbon being captured by
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the growth of the trees. And those
carbon credits have a value.
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The current government guarantee scheme
is in the range of £17–£25 per carbon unit.
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Most of the long-term forecasts
are more upside than that,
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but it’s obviously a relatively
new market, so everyone’s still
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getting used to how this is
going to work.
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And Brexit, has that been a bonus
or a negative for forestry?
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Well, there’s a few implications of that,
so Brexit impacted currency,
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currency is a key aspect of timber
demand, so when the UK looks cheap
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in terms of pounds sterling,
foreign money comes into buy our asset.
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For us to buy things on the international
market is more expensive, because
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sterling’s low. So that was one effect.
I mean, the UK imports better than
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two-thirds of all the timber it uses
every year, so we’re a net consumer
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internationally, and although we export,
we import huge amounts of timber.
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And how risky is it?
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The main risks around forestry
are to do with tax risk,
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will the government change the tax regime?
There’s no indication they will,
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but that’s always a risk. There’s
political risk around land use
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and access to land for amenity
as well, I think.
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Especially if it’s
all in Scotland?
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Yes, potentially, albeit that the
Scottish government is actually very
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pro investment in forestry, and has
very aggressive new planting targets,
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which they can’t achieve without supporting
private investors coming into the market.
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So I wouldn’t say it’s any more politically
risky than the rest of the UK in that respect.
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And then you’ve got climate change risks,
so drought conditions are not good
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for forestry, potentially. Drought conditions
stress trees, so disease risk becomes
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a more important factor. On the other
hand, we get lots of rain in Scotland,
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for example, and the North, so it’s
not been that much of a risk so far
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but you could see it over the next
30 years becoming a bigger risk.
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