The Handbook of Alternative Assets by Peter Temple

Author:Peter Temple
Language: eng
Format: epub
Publisher: Harriman House

Basics

The UK was once covered with forests, but the industrial revolution and subsequent eras led to wholesale clearance of forestland. This proceeded to the point where, at the turn of the 20th century, only about 5% remained under woodland. The figure now is around 12%. Much of this reforestation has occurred since World War II, as successive governments have tried to encourage the commercial timber industry. The state-owned Forestry Commission dates from 1919.

Most of the private sector forestry established since the war is in Wales, Northern England and Scotland. It is predominantly of Sitka spruce, a perennially productive and hardy species. The outlays of that period were made because investment in forestry then attracted an immediate income tax deduction, rather as do Enterprise Zone Trusts and Enterprise Investment Schemes now. This concession ended in 1988, although sizeable tax benefits remain. These include grants originally designed to compensate investors for this loss of income tax relief. The size of the forest market potentially available for outside investment was also boosted from 1980 onwards when some Forestry Commission properties were sold off, although this source of supply has now dried up.

The current UK figure of 12% for forest coverage compares with an average of 31% forestation across the EU and much higher percentages (around 60%) in countries like Finland and Sweden. The EU currently produces only 25% of its timber requirements, compared to abundant self-sufficiency in food, although the enlarged 25-member EU will be 95% self-sufficient. The EU and individual member governments support the forestry industry with tax breaks and grants, recognising that there is both an economic case for supporting forestry and to encourage its role of sustaining rural development. Interestingly, forestry falls outside the scope of the Treaty of Rome: most EU grants derive from the environmental benefits conferred by forestry, or from taking land out of conventional farming.

Scandinavia is indelibly associated in people’s minds as the home of forestry, but in fact the climate for growing trees in the UK is superior to Scandinavia and among the best in the world. It is on a par with Chile and bettered only by New Zealand. Trees in Scotland, for example, on average put on 16 cubic metres of growth per hectare per year, compared with around five cubic metres in Russia and Canada and seven or eight in Scandinavia and the USA. It is this strong growth that underpins any investment in UK forestry. It does, of course, also underline that forestry is a naturally renewable resource.

The returns investors can earn from forestry as an alternative investment are therefore reasonably predictable. They are a function of the maturity and quality of the woodland you own, timber prices, and the tax breaks and grants available. Commercial timber in the UK takes about 40 years to mature fully. Where, in this cycle, an investor might buy in, governs the price paid per hectare, as well as the timing and scale of the income that can be extracted. Whether an investor buys an

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