Forestry investments, just like any other traditional investments, have risks associated with them that need to be taken into account before any investment decisions are made. Below we will debunk three common qualitative risks associated with forestry investments and explain why they offer little feasible grounds for concern.

Investment Depreciation and ROI

The value of timber investments and the revenue that comes from them are subject to both internal and external factors, such as management mechanisms, technology developments, environmental conditions (natural disasters, insects, disease), the overall state of the global economy. All of these factors can increase as well as decrease profits, sometimes in an unpredictable manner. However, historically, timber investments have performed well. The fact that forestry investments intrinsically involve land assets  gives us a viable reason to believe that their value will increase with land appreciation over time. In terms of return on investment, statistics indicate that forestry investments have delivered increasing profits over time. In the U.S. the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index, for example, has climbed by an average of 14 per cent per annum (pa) from 1987 until 2010, outperforming the S&P 500. In the UK, according to figures from the IPD UK Forestry Index, the average total return on forestry investments in 2010 was estimated at 20 per cent per. This is 8.9 percentage points higher than the 11.1 per cent over 2009. Moreover, the IPD UK Forestry Index shows that, compared to other assets, forestry investments scored the highest returns in 2010. As a comparison, commercial property scored 15.1 per cent, equities were at 14.5 per cent and gilts yielded 9.1 per cent. The overall returns of timber investments in the UK in 2010 were at the third highest level since 1992, proving their strong performance. Recognizing the high return potential of forestry investments, the IPD UK Forestry Index sponsors’ committee said: “The UK’s commercial forests are a unique renewable asset. The growth of competing demands for both sustainably grown wood products and for wood based energy and heat generation underpin their value.” Below is the IPD UK Forestry Index comparative chart showing timber investments ROIs from 1995 to 2010.

Forestry Index

Varying Commodity Prices

The prices of pulp and lumber are very much influenced by supply and demand on the commodity markets and can of course fluctuate. For example, in an economic recession, timber demand for existing and new building projects will decrease, which, in turn, will drive timber prices down. In addition, commodity markets are subject to cyclical price changes where periods of high costs are followed by periods low ones. However, prices of products from timber investments in the UK have shown an increase in the last few years. They surged by 38.4 per cent in the year ending March 2011, per numbers provided by IPD UK Forestry Index. As a comparison, in 2009, the timber price increase was at 6.6 per cent pa. At the beginning of 2011, the average price for coniferous standing sales was £13.70 per cubic meter.

IPD Forestry Index vs. Timber Price Index

Government Regulations

Some investors are wary of government- imposed regulations on harvesting and trading timber products. For example, in the early 1990s, harvesting restrictions were placed on forestry investments in the U.S. The government used the new legislation in order to protect endangered species from extinction. Today, an increasing number of timber investments worldwide are adopting sustainable forestry management practices, replacing the logging of natural forests with reforestation efforts. New business models recognize that the environmental and non-commercial value of forests (biodiversity and the cultural and economic benefits local communities) is just as important as monetary returns. In the UK, integrative forestry management and eco-friendly timber production practices are even encouraged through tax incentives. Income from timber sales is exempt from Income and Corporation Tax. In addition, forestry investments growing timber in the UK are free of Capital Gains Tax. Commercial forests, after two years of ownership, qualify for 100 per cent Business Property Relief from Inheritance Tax. This can be particularly attractive to investors, who want pass on their wealth in a cost-effective way.