Forestry Funds

A guide to forestry funds

Forestry funds are enjoying a surge in investor interest. The bullish returns generated by forestry investments over the past years has meant that an investment in forestry has consistently outperformed other more popular asset classes such as equities and real estate. Annual returns from British forests reached an average 16.1 per cent over the past three years, according to Investment Property Databank, a real estate benchmark provider. This compared with a 6.9 per cent return from fixed income and a 1.3 per cent loss from equities.

What are forestry funds?

Most forestry funds manage forestry assets on behalf of individual and corporate clients enabling them to collectively gain access to a globally diversified portfolio of sustainable forests. Alternatively, you can choose to invest in forestry funds which operate domestically with UK based forest assets or opt for forestry funds which focus on forestry opportunities globally although many investment funds have a particular regional focus such as Latin America. A diversified portfolio of forestry assets which differ by species and age from predominantly European based spruce forests to sustainably managed tropical hardwood timbers such as teak, mahogany and agarwood in Central and South America.

The growing interest in forestry investments and forestry funds comes as international governments set sustainable energy targets for the future with an increasing proportion of energy production coming from renewable resources. This provides a basis for strong future marketplace for wood and wood-based products with increasing use of renewable fuel sources such as wood chips and conversion of European coal-fired power stations to burn biomass. Investors around the world are learning that financial performance can go hand-in-hand with social and environmental responsibility.

Today a number of forestry funds are successfully fundraising highlighting strong investor interest in forestry amid renewed uncertainty over mainstream assets such as stocks and bonds. Increasingly pension funds and life insurers are among those seeking to move into new asset classes and are seeing the benefits of long-term forestry investment.

How are forestry funds structured?

Forestry funds are collective investment schemes designed to enable individual investors to cost effectively participate in a wider range of forestry investment opportunities such as commercially managed forests. The added benefit of investing collectively with others is that, as investor you are able to enjoy returns from forestry funds investing in differing forestry plantations globally. UK forestry funds are increasingly making international acquisitions of forestry plantations which offer proximity to fast-growing emerging markets such as Brazil, Costa Rica, India and China and meet global demand for different timber products such as tropical hardwoods such as teak. The forestry industry itself is also shifting southwards as average growth rates in Brazilian forests are seven times faster than in Northern Europe while production costs are a third lower.

By owning a proportion of managed forestry fund, investors are able to maximise their forestry returns through an investment shares spread across a mix of forestry projects which own productive land or are fast growing sustainable plantations growing for the sawn timber market which together generate steady, non-correlated growth year on year. Forestry funds also enable individual investors to benefit from forests managed by a specialist firm as all projects costs are shared among the collective.

The benefits of forestry funds

Despite being labelled an alternative investment, forestry funds are relatively straight forward purchase much like shares. By their very nature forestry funds are viewed as low risk purely on the basis that returns are generated from the funds assets i.e. its trees. Both the volume of standing timber and the unit price increases as the trees grow, should economic recession affect timber prices, trees can be left maturing for a few years until prices recover and may have even risen further in value due to their maturity unlike agricultural investments which often have a predefined harvest time.

The number of forestry funds launching is bolstered by the advantageous tax nature of forestry investments coupled with the steady, long term tax-free gains forestry has to offer as commercially managed forests are exempt from corporation tax.

Typical UK forestry funds are aimed at the retail market are designed to take full advantage of these tax benefits and will have a 10 year maturity date, with an investment mix across five to ten forestry projects. Most forestry funds can also be placed in the tax free wrapper of a self-invested personal pension.

Alternative options to forestry funds

If you are looking for an alternative collective investment to forestry funds, there are a range of structured collective investments which enable investors to directly invest and own forestry plantation plots as opposed to shares in a fund which owns the forestry plantations. Direct collective forestry investments are typically structured with a package of 100 tree seedlings for approx £5,000. Harvest is 25 years usually with a buy back option part way through the investment usually when harvesting begins for a predefined a return of say 5%. This way of investing in forestry offers investors the opportunity to better manage the return on their investment with greater control over factors such as harvest date in line with their personal circumstances.

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