Lumber offers good returns, but there are brambles among the oak
Published 25/03/2010 | 05:00
YOUR father probably told you that money doesn't grow on trees, but 'Sharescope' begs to differ.
Lumber prices are rising sharply right now, as demand for timber from China and other markets continues to soar, countries elsewhere belatedly protect their rain forests from destruction and an epidemic of mountain pine beetles destroys many of Canada's timber plantations.
Returns on forestry investment have been good in recent years. The UK-based Investment Property Databank's UK Forestry Index shows that forestry outperformed shares, bonds and commercial property over the medium term, with the five-year return running at an annualised rate of 16.2pc.
While this is a fantastic figure, the long-term figure is a much more sober annualised return of only 5.2pc. Timber prices plunged between 1995 to 2003 following a flood of low-cost imports from the Baltic states.
Still, the relative movement against the trend of the market underlines the idea that timber could bring important diversification to your investment portfolio.
Those sold on the merits of timber face two broad alternatives. The first is to buy land, extract a load of generous grants from the Government and enjoy a financial return when you harvest the timber in a few decades' time.
The other choice is to buy funds which invest in wood. It is undoubtedly the more practical alternative, but one would want to be completely without soul not to get excited about owning a real forest.
It is almost impossible to do anything with timber in Ireland without reference to Coillte and Teagasc, which offer detailed advice (aimed almost exclusively at farmers) on how to collect the annual tax-free Forest Premium payment of over €500 a hectare for 20 years and avail of other generous grants to cover most of your costs.
Anybody wishing to set the ball rolling this year will need to hurry; the deadline for grant applications is April.
For those without the money to buy a farm, funds or exchange-traded funds (EFTs) may be the answer.
Funds actually buy land, apply for the grants and manage the land on your behalf, while EFTs invest in a group of stocks closely invested in timber.
Funds over here include the Dun Laoghaire-based Irish Forestry Fund, which claims more than 17,000 investors with more than €90m in Irish forest assets.
Others include Premier Irish Forestry Funds and the Irish Forestry Unit Trust.
Funds over in the UK include Four Winds Capital Management, which runs the Phaunos Timber Fund, or the smaller First Stellar Forestry Fund.
Those looking for the cheapest form of exposure to timber should consider the iShares timber and forestry ETF, which has a low annual charge plus other costs of 0.55pc and can be purchased through a stockbroker.
While there is no shortage of choice for those who want to invest in timber, the choices can be bewildering and there are many brambles along with the odd oak; the old rule that you should ensure you do your research carefully seems to apply in this field more than most.