UK forestry investments recorded an unleveraged return of 10.7 percent in 2016, according to the IPD UK Annual Forestry Index, marking a decline from 19 percent in 2014 and 11.5 percent in 2015.
Despite the fall, the provider of the index, MSCI, said the decade to the end of 2016 has witnessed continuous strong performance by UK forestry investment, with annualized total returns of 13.3 percent, 14.7 percent and 17.4 percent over three, five and 10 years respectively.
The IPD UK Annual Forestry Index is calculated from a sample of private sector coniferous plantations of Sitka spruce in mainland Britain.
“The return on forestry is generated in two ways: through revenue on the sale of the timber and from increases in the capital value of the land. It takes 35 to 40 years from planting the Sitka spruce to harvest, so you have a long period of capital growth,” Jason Sinden, investment & property director at forestry and harvesting firm Tilhill told Agri Investor. The yield on timber sales in 2016 was 4.7 percent.
The 2016 return was driven by capital growth of 10.9 percent, offsetting the normal negative income return that results from the sector’s lack of regular cash flows, MSCI said.
Climate conditions in the UK are well-suited to Sitka plantations, a non-native species, Sinden says. “Sitka spruce grows better in the UK than almost anywhere in the world, and it can be planted on cheap low-grade land.”
Across the UK, Wales saw the highest total return at 14.2 percent, closely followed by northern England at 14.1 percent, although the latter recorded stronger capital growth at 15.3 percent.
By the end of 2016 the 142 forests in the index had a total capital value of £341.6 million.
MSCI said that forestry has diversification benefits, as it has “generally exhibited a negative correlation with other UK property sectors, and has shown excellent hedging characteristics against the market downturns that have affected more volatile assets.”