For the fifth consecutive year UK forestry investment returns outperformed commercial property markets
By Finfacts Team
Jun 24, 2011 - 7:23 AM

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Source: IPD Forestry Index and IPD UK Annual Index

Increasing timber prices drove forestry investment returns in 2010 to their highest levels since 2007, at 20.0%, according to the IPD UK Forestry Index.

For the fifth consecutive year forestry outperformed commercial property markets. As a strategic limited resource and with strong demand from all sectors, underlying investor sentiment has remained strong. As a result forestry was one of the few property assets classes to avoid negative returns in the downturn.

Over a three year period forestry outperformed other asset classes by a substantial margin, delivering returns of 12.6%. Gilts delivered 7.7%, Equities 1.4%, and commercial property -2.5%. Over a five year period the outperformance is even more pronounced, with forestry returning 17.7%. Over an 18 year period forestry has returned 6.3%.

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.

"Forests have a key role to play in carbon capture and sustainable development. This value will be realised on a sustainable basis only if UK government policies balance the interests of the owners of forests and competing wood using sectors."

Drivers of Performance: Timber prices rebounded by up to 38.5% over the year to March 2011. Forestry returns are closely linked to these, though timber prices are the more volatile asset, whereas the forestry returns remained relatively stable, and are considered to have a low correlation with other asset classes.

The double-digit annual return is an increase of almost nine percentage points on the 11.1% total return seen in 2009. Returns are on a par with those seen in 2006, but are not quite as high as the 31.6% seen before the downturn in 2007.

The IPD UK Forestry Index - - calculated from a sample of private sector coniferous plantations of predominantly Sitka spruce across 144 forests worth £148.1m – is derived from a series of annual valuations and cash flows.

Over a three year period plantations in South Scotland continued to outperform the other areas in the UK, with returns of 17.9%. Commercial forestry in Wales was the worst performing region, delivering returns of 5.3%.

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