The outlook for sustainable forestry investment in 2023

As we move into 2023, the world faces several macroeconomic challenges.

Analysts are forecasting a UK recession as the market awaits fourth-quarter GDP data. Double-digit inflation stemming from the disruption to global supply chains following Russia’s invasion of Ukraine has resulted in a cost-of-living crisis. Markets remain volatile, reflecting opinions on growth prospects – especially in the UK – following a period of political instability.

While trees grow irrespective of cabinet reshuffles and economic indicators, the forestry sector remains proximate to wider market forces. These forces will continue to provide headwinds and tailwinds to sustainable forest owners and managers in 2023 and beyond.

The clearest headwinds include: a recessionary economic environment, rampant inflation and a rising cost of capital. How will forest investments respond to these factors, and what opportunities remain within the sector?

Lack of correlation

In short, historic analysis would suggest the forestry sector demonstrates relative stability during economic crises. Forests, like any real asset, are valued on the cashflows they generate. Trees have long harvesting windows, usually around 15 years, allowing forest owners to refrain from harvesting when demand and associated prices are low, instead leaving the crop ‘on the stump’ to add volume and value until markets recover.

Given the infrequent income profile of harvesting trees, relatively little debt is employed in the sector, protecting the market from distressed sellers when borrowing costs rise. It is this lack of correlation to other traditional asset classes that supports capital values against a backdrop of macroeconomic challenges.

While timber markets may be volatile, timber fiber remains core to a huge array of products. Not only does this ensure it retains a strong inflation correlation, but it also means trade volumes must be maintained. Such liquidity will ensure there is reasonable cashflow as and when required, but this can be controlled by forestry managers.

Looking out over 2023, we do not expect there to be huge capital growth across the sector. Indeed, there will likely be sideways movement in underlying valuations, but all the traditional qualities of forestry will ensure valuations are supported until the markets recover.

Tailwinds

On a more positive note, some significant and increasing tailwinds in the sector remain. As global decarbonization gathers speed, there is an increasing understanding of the part sustainable land management and forestry must play in achieving net zero.

This is not just confined to growing trees to produce sustainable construction materials and other traditional timber-based products but has now also expanded to the sequestration of carbon, the ability of forests to deliver enhanced biodiversity and the development of rural communities and amenities.

The outcome of this is twofold. First, we expect to see ever-increasing demand and requirement for more afforestation. Second, we are already witnessing a rapidly-expanding universe of investors looking to support and benefit from this process.

Afforestation, the planting of additional new trees, lies at the heart of many government strategies. In the UK, there are targets to plant at least 30,000 ha per year by the end of the current government. At the moment less than half of this target is being achieved.

Recent senior political appointments have made it clear this ambition remains core to the government’s plans, and we expect to see some fundamental support to expand and encourage the sector to plant more trees.

This will include both productive conifers and longer-term broadleaf planting to provide a wide array of economic, climate and environmental opportunities to a broader range of stakeholders, including investors.

While economic headwinds will buffet the sector, expect the long-term qualities of forestry investment to shine. Hopefully, 2023 will prove to be a year that government and private capital align to tackle the climate emergency and accelerate afforestation.

Olly Hughes is managing director, forestry at Gresham House