ASK THE EXPERTS

TILHILL FORESTRY’S BRUCE RICHARDSON JOINS US TO ANSWER A QUESTION ABOUT THE SUSTAINABILITY OF CURRENT TIMBER PRICES

ARE THE IMPROVEMENTS SEEN IN STANDING TIMBER PRICES RECENTLY BEING REFLECTED IN THE PRICES PAID FOR FORESTRY, AND ARE THESE PRICES SUSTAINABLE? ANSWER: Commercial forestry has been a top performing asset class over 3, 5 and 10 years, outperforming other classes such as equities, gilts and commercial property. In 2017 we saw a total return for forestry of 13.9%, up from 9.9% in the previous year

The value of a forest will be affected by the value of the standing timber in it, or, more accurately, the investor’s view of the future value of that timber. The species mix, age class and location are clearly important too, and for a well-located forest with mature, quality timber, the timber value can make up to 80% of the purchase price.

The Forestry Commission’s standing timber sale index was 28.2% higher in real terms in the year to March 2018, compared with the previous 12 months. This is a significant increase over previous years and is driven by a combination of exchange rate, increasing demand for home-grown timber and shortening of supply. Biomass demand has a role to play in this together with continued investment in timber processing capacity across the UK. It would seem unlikely that timber prices will fall back to previous levels in the near future.

In recent years, we have seen forestry price rises moving ahead of timber prices, implying that investors have been building improved timber prices into their purchase decisions. It’s not clear yet if this is fully incorporated into prices being paid. The forest market remains strong with demand outstripping supply. Given the returns quoted above, who can blame a forest owner for holding onto their forest investment?

This article is for information only and should not be interpreted as investment advice.