OUT OF THE WOODS
Scotland's forestry is a growth industry
Few features of Scotland’s countryside evoke more emotions than forestry. Not all that long ago there were complaints that too much of Scotland’s hills and uplands were being covered in commercial woodland. Others have bemoaned the dominance of Sitka spruce, reckoned to account for some 70% of our forests. Critics say it creates a monoculture habitat that can leave a forest susceptible to catastrophic diseases.
More recently, environmentalists have deplored a trend towards deforestation worldwide, while local tourists complain the felling of large areas has left an ugly expanse of rotting stumps akin to a nuclear aftermath. But our forestry estates are arguably the most undervalued and underappreciated assets in our countryside, with Scottish forestry thought to be worth £1 billion – and growing. And the pace of growth has seldom been more robust than it is now.
The timber lorries are on a roll. Recent Forestry Commission statistics show a surge in the price of standing timber, which is up 28% in the year to the end of March 2018. The knee-jerk charge is that change is ‘all driven by greedy speculators’, but the price rise is being driven by pressures that are highly positive for the overall quality of our lifestyles.
There is intensifying demand for new houses to address an acute shortage. Housing is a major user of timber and completions have recently been hitting their highest level since 2007. Secondly, there is growing demand for timber and timberrelated products as a substitute for plastic. This drive for more environmentally-friendly alternatives is gathering pace, fuelled by programmes such as Blue Planet.
Running parallel to this is a growing demand among investors, private and professional, for less volatile and environmentally friendlier forms of investment. Meanwhile, there is growing pressure to reduce our reliance on imported timber. Last year the total value of wood imports to the UK, accounting for 70% of domestic consumption, hit £7.9 billion, up 6% on the previous year. By comparison timber exports were just £1.9 billion.
So, in addition to the direct economic benefits to the industry in Scotland, there are many positive forces behind growth in forestry, although it is still a very small market compared with other asset classes. ‘In the early 2000s, forestry was undervalued as an asset class,’ says Jon Lambert, senior partner at Edinburgh-based John Clegg & Co., one of the largest UK companies specialising in forestry sales and purchases and forestry management.
‘The market was very thin but woke up in 2005. Demand is outstripping supply. But it’s a tiny market – the value of forest land and crops changing hands across the UK each year is just £150 million.’ And while an increase in planting should boost wood production over the medium term – a crop typically takes 30 years to grow - the outlook beyond 2030 is problematic.
‘After 2030 the expected crop falls rapidly, and that 70% imported timber figure is set to rise even higher,’ he says. ‘So there is an expectation that timber prices will continue to increase and we should continue to see more timber price inflation over the next decade.’
Confor, which represents 1,500 forestry and wood-using businesses, says the price spikes reflect a booming wood processing industry and highlight the need to increase tree planting significantly. And
there are real opportunities, they add, for farmers to diversify and plant a portion of their land with trees to create a more sustainable business model after Brexit.
‘We are already the world’s second largest net importer of timber after China but the UK government is still missing its modest tree planting targets,’ says Andrew Heald, Confor’s technical director.
Prices, he added, were even higher in some hotspots, including Wales and Dumfries & Galloway. ‘A steady supply of round timber is essential for sawmillers and processors to plan their operations and to have the confidence to continue to invest in their mills and factories.’
However, with forestry comes wider responsibilities than maintenance to ensure a healthy crop and to keep pine weevil at bay. There are transport costs of felled timber together with road and track maintenance – not all roads can take the weight of log lorries.
And durable fences are needed to prevent deer from invading crop fields and munching their way through private gardens. A sharp eye also has to be kept for changes to the tax and regulatory regime.
No Income Tax or Capital Gains Tax is payable on the sale of timber while commercial forests are entitled to 100% Business Property Relief from Inheritance Tax after two years of ownership.
Ahead of the Forestry and Land Management (Scotland) Act due to come into force next April, comes a consultation by the Office for Tax Simplification to explore changes to Inheritance Tax.
The review covers IHT relief for farming businesses, including Agricultural Property Relief (APR), Business Property Relief (BPR), Capital Gains Tax (CGT) and the CGT uplift rules. The review asks whether the availability of these reliefs affects or distorts farming business decisions.
Always beware a government agency that says it wants to simplify things, but the hope is that as long as BPR is kept in place and relief is not restricted by a cap, it should not affect land prices.
Meanwhile Galbraith, one of Scotland’s leading rural management and property consultancies, says investors are missing out on healthy returns in a forestry sector boosted by tax incentives and increasing global demand for timber.
Philippa Cliff, head of the firm’s forestry division, says commercial forestry has been the top performing asset in the UK in the past 15 years, with the best woodlands generating returns in excess of 10% a year.
‘Despite this impressive performance there are actually very few investors active in the market,’ she says. ‘Woodland seems to be considered as an investment option only by a few people in the know.
Planting land is relatively inexpensive to acquire – in Scotland it is currently less than £5,000 per hectare despite experiencing a rapid rise in value in recent years, so growing trees can offer better prospects than sheep farming.’
Solid returns, she adds, are likely to continue. This is down to three main factors – a rapidly growing biomass sector, an increasing demand for timber (set to rise 33% by 2050), and the Forestry Commission’s Woodland Carbon Code, which allows forest owners to trade in woodland carbon units.
Forestry, it would seem, is Scotland’s best-kept investment secret.
The market was very thin but woke up in 2005. Demand is consistently outstripping supply