Seeing the wood from the trees
Published 30/06/2009 | 10:58
In the current investment environment of high volatility, market uncertainty and environmental concerns, it is only right that investors should look at investments that do some good rather than just delivering a profit.
You might consider a range of environmental stocks, or buying into a wind farm or other power replacement scheme, but good as these are, there is little that delivers a better global benefit than planting and growing trees.
First, a little background information. Man has been exploiting trees since the dawn of time, but he has not been very good at replacing those harvested. This is especially true of both the hardwood and deciduous varieties that are so good at consuming carbon dioxide (CO2).
It is said that the average person living in the western world produces 160 tonnes of damaging CO2 every 16 years. A hectare of teak will consume 320 tonnes of CO2 over the same period.
There are few who would dispute the fact that timber is good for the environment, but what are its investment properties and does it make a good investment?
First we have to distinguish what is meant by ‘timber.’
There is hardwood and there is softwood and they each have different characteristics as an investment.
Softwoods tend to be grown in the temperate climate of countries such as Sweden and the UK.
Softwoods grow quickly and have one set of commercial uses whereas hardwoods grow slowly and have a different set of uses.
The variety of hardwoods is huge and ranges from home grown oak, to teak from Brazil. What you need to realise is that trees grown in climates such as Brazil’s will grow at about double the rate of the same tree grown in a temperate climate.
What, then, about its value? Hardwoods, because they are not grown in the same quantity as softwoods, will always command a premium price. At the same time, because the world is becoming more densely populated, there will also be an increasing demand for timber products.
From an asset class perspective, timber is the perfect portfolio diversifier. It has very low volatility and does not correlate with equities, bonds or property.
One of the more interesting points to note is that if there is a downturn in demand and/or price, such as we are experiencing now, it has natural warehousing properties and can be left “on the stump” as it were.
Of course timber has its own set of associated risks, such as disease and fire and this will form part of the next consideration, which is how to buy into timber investments.
You can of course buy direct and do it yourself. However, managing a stand of timber is not a simple task but one that requires high levels of expertise.
This said, there are funds available to buy into that and actually own the timber.
But the most important consideration when buying into any timber-based scheme, is whether the project managers own and run all the process — ie the land, the seed, the timber mills and the sale of the mature timber — as this is the only way they will be able to give reasonable assurances to investors about the profit outcome.
So what return can an investor expect from an investment such as this? For softwoods grown in the UK the return is typically, on average, some 5% per annum. For hardwoods grown in Brazil it is typically 10% per annum.
The thing to remember is that all timber investments are long term investments, by which I mean a minimum of 10 years.
For products such as Trusts and Pension Schemes therefore, they are highly suitable.
Depending on how and where you buy, there can also be a variety of tax benefits.
In the UK Capital Gains Tax is not payable on the growth in value of the trees and both the land and timber crop are 100% exempt from Inheritance Tax.
And finally, the income from timber harvesting is specifically exempt from income tax.
As with all investments, you will need to do some serious research and make sure that whatever you are considering fits with what you are trying to achieve.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk