Growth potential - investing in forestry
Solid yields and low risk factors make forestry an increasingly attractive investment option
Published 27/01/2016 | 02:30
There is a growing interest worldwide in forestry as an investment due to a combination of its low volatility, relatively risk free status and level of returns achievable.
Investors have been making inroads into the sector long before the recent turbulent ride on the stock market as many consider forestry as an investment that moves away from traditional asset classes.
Forestry has many natural properties such as age, class, species, market and end use which allows flexibility in management to achieve best financial returns. Traditionally it is seen as providing a solid yield, due to its growth rates, with relatively low ongoing capital investment.
Forestry is one of the oldest forms of investment with the diversity of timber products produced now part and parcel of everyday life including timber to build homes, fuel and food packaging.
The recent COP21 climate change conference in Paris is likely to lead to increased integration of forestry into combating climate change. The agriculture sector accounted for 32.6pc of Ireland's total national emissions in 2013.
Forestry removes CO2 from the atmosphere and also provides raw material for construction and fuel for renewable energy generation. The key to mitigating Ireland's agricultural emissions lie both in increased on farm efficiency and forestry expansion to sequester emissions from the air.
Forestry is considered a real tangible asset, rather than stocks that have many investors quaking in recent days. It also provides a real return to investors from sales of timber, and annual forest premiums in the case of Irish forestry.
The annual forest premiums available to all landowners are detailed in table 1. Separately, farmers can continue to receive their Basic Payment Scheme on land they plant to forestry. This provides an additional incentive to farmers to engage in forestry, particularly on marginal land.
It is important to note that forestry resources are finite. The production of timber takes time which ensures the ability to increase forestry supply can only happen over long timeframes. The current scarcity of timber in Ireland is resulting in the importation of around 500,000 tonnes of roundwood annually into Ireland.
The strategic goal of Ireland's forest policy 'Forests, products and people' is "To develop an internationally competitive and sustainable forest sector that provides a full range of economic, environmental and social benefits to society and which accords with the Forest Europe definition of sustainable forest management".
In order to achieve this, increasing the forest area by 15,000 hectares per annum from 2016 to 2046 in order to support a long term sustainable roundwood supply of 7 to 8 million cubic meters of timber per annum is a recommended policy.
However, we are currently falling behind with 6,252ha planted in 2014.
This policy is supported in Ireland by afforestation grants, which cover the full cost of establishing and maintaining a plantation for the first four years, and annual forest premiums payable to forest owners.
Support schemes in the form of forest roads and woodland improvement grants are available to facilitate proper forest management.
However, the caveat is that forestry is a long term investment meaning the imperative is to match a forestry investment with the objectives of each investor.
Paddy Bruton is managing director of Forestry Services Ltd. Agribusiness award winners 2015. For further information see www.forestryservices.ie
Why invest in forestry?
There are many answers to this question, but they are summed up as below:
• Land based asset
• Long term capital growth
• Favourable tax status
• Growing domestic (energy) and export markets (Sawn timber and panels)
• Predictable growth rates
• Low risk
• Green investment -
Total forestry return is comprised of five main components: acquisition, biological growth, active management, price trends and forestry value changes.
The day you buy is the day you sell. Purchasing the correct property is of paramount importance. Issues such as species, access, productivity, distance to market and environmental considerations must be taken into account in ensuring one does not overpay at time of purchase.
Trees continue to grow regardless of the economic climate. This uniqueness of forestry ensures reliable asset appreciation, while lowering investment risks. Harvesting timeline can be scheduled to maximise financial returns in periods of price spikes. Essentially, forestry is not like other crops where upon they are ripe for harvest they must be harvested.
Actively managing forestry significantly increases the financial returns from the investment, while at the same time reducing risks. Such management operations typically involve the following:
Optimum ground preparation and drainage
Planting of superior planting stock
Perimeter fencing to exclude trespass by animals
Controlling competing vegetation
Selective fertilisation where required
Formative shaping of broadleaves
Obtaining harvest and other necessary Felling Licences on a timely basis
Forest road construction
Commercial and pre commercial thinning