2022 has been a mixed year in terms of the value of commercial softwood. Sawlog prices have come down significantly due to the impact of Storm Arwen working its way through the system and to the inventory levels of wood processors rebalancing after historic covid-19 highs.
However, the European energy crisis has seen bioenergy starting to compete fiercely for small roundwood and chip wood. Many forest owners have chosen to leave value growing ‘on the stump’ in anticipation of hungry supply order books in the not-too-distant future.
With the war in Ukraine, inflation running high and exceptional economic turbulence including rocketing UK gilt yields, the basis of all UK asset valuations has recently been called into question.
Should the apparent increase in the risk-free rate translate to a higher cost of capital for UK land and forestry investment? On the demand side, there are stagnating levels of global growth and a Chinese housing crisis.
Despite this, established UK forest asset values are up 15 percent according to the Goldcrest-Tillhill UK Forest Market Report, and up 7.5 percent by Savills’ estimates, while afforestation land values were up 50 percent in the UKFMR.
Historically, UK forest assets have shown strong resilience to financial shocks and inflation, and have demonstrated low or inverse correlations to equities and bond markets. Based on asset valuation reports and fund performance, this year seems to be in keeping with that trend.
But what is driving this enhanced performance for investors while timber prices are relatively weaker and other markets are experiencing intense turmoil?
A few points:
- A weak GBP makes imports relatively less attractive and increases demand for local supply.
- UK forest owners are typically unleveraged, insulating the market from rises in base rates.
- Russian timber (20 percent of global timber trade) is classified as conflict timber, so supply of certified timber is tight.
- Governments are looking to ‘build back better’ to fend off recessionary pressures.
Timber markets are cyclical, but the forecasted global supply shortage of timber seems to have investors taking the medium-term view that it will experience growth. With 80 percent of UK timber imported, supply declining due to the age structure of existing commercial forests, and our relatively wet, more temperate climate, UK forest owners are well positioned.
As well as sustainable timber supply, forests and woodlands can provide other societal natural capital services such as carbon sequestration, flood protection, biodiversity uplifts, jobs, and social benefits to local communities. These attributes have become more prominent in the minds of owners/buyers and this is reflected in valuations.
Role of carbon and biodiversity
Voluntary carbon units can be secured through afforestation projects and the launch of the LSE’s Voluntary Carbon Market is a significant development in the UK’s fight against climate change and for the forestry industry.
The UK Woodland Carbon Code is currently the preference for most UK afforestation developers with units trading for between £14 and £35 per tonne, although prices in excess of £100 per tonne are forecast as a result of the huge increase in net-zero pledges by corporates. Crucially, we are seeing tangible value ascribed to one of the other services that forests deliver, alongside timber supply.
Biodiversity uplifts and nature-positive certificates – either as co-benefits to carbon sequestration or as standalone items – are also the topic of much discussion in the industry. Could this be another diversifying income stream of material scale that incentivizes more diverse, nature-positive forest designs?
To conclude: of particular note this year has been the resilience and strength in depth that the UK forestry market has shown in the face of adversity. And the key emerging theme is investor recognition of the natural capital services that forests and woodlands can provide to society.
Investors seeking natural capital alpha are realizing that forestry can deliver a sustainable financial return in combination with very strong sustainability and ESG outputs. This is powerful, particularly in the context of COP27 and COP15, and the climate and biodiversity crises that those international summits are aiming to address.
Robert Guest is managing director and co-lead of Foresight Sustainable Forestry Company