It’s been a robust year for the forestry sector, according to Tilhill Forestry and John Clegg & Co’s UK Forest Market Report 2019, which was recently launched in London. Carolyne Locher reports.

THE Forest Market Report (FMR) is a snapshot of the UK commercial forestry and woodland investment market and includes a review of the timber markets. An annual study, the FMR includes all publicly recorded completed sales of, primarily, commercial conifer forests greater than 20 ha. First published in 1998, the FMR has since recorded 1,781 transactions with a total value of £1,263 million and 277,000 stocked ha, making it the most comprehensive publicly available record of forestry transactions in the UK.

Guests, mostly members of the investment community, were welcomed to the launch by Peter Whitfield, Tilhill Forestry’s business development director.

Bruce Richardson, head of investment and property for Tilhill Forestry, began his presentation with the top story: “From October 2018 to September 2019, we saw sales worth £126 million, up £22 million on the previous year. Scotland saw 78 per cent of the sales, with 11 per cent in England and 11 per cent in Wales.

“Of a gross 14,000 ha sold, 11,024 ha were stocked (the commercial element), i.e. 81 forests with an average size of 136 ha worth an average £1.56 million. The number of forests sold is in line with the long-term average. The number of stocked hectares is below the ten-year average (12,278 ha).”

The unit price generally moves in line with timber prices. This has been the case for 20 years. Last year saw a marked increase in forest property, possibly due to a mix of inflation and the quality of the properties.

“Of mixed woodlands larger than 25 acres, mostly broadleaf with small, highly commercial conifer blocks, we tracked 44 transactions over 2,250 acres with a guide price of nearly £9.25 million, mostly in England.

“Over 13,000 ha of new woodlands were created last year, with 60 per cent commercial conifers, supporting industry and investment. The target set by the Committee on Climate Change is 30,000 ha a year, a figure not achieved since 1975.”

Most new woodland creation was in Scotland (11,200 ha), where a supportive government has increased its planting targets to 15,000 ha p/a by 2024/25. There are still significant delays in receiving planting approval. The lag in England and Wales could be due to pressure on land use and higher land values.

Last year’s FMR introduced natural capital, or ecosystem services: “Public goods (such as biodiversity, clean air, carbon mitigation and improved water quality) provided by forestry and not paid for. Using natural capital, a forest’s value is 9–10 times higher than the actual value of the land or timber. It is a hard calculation to make, and contentious, but it underpins post-CAP agricultural and grant policy thinking.”

The Woodland Carbon market is developing. Since the Woodland Carbon Code’s launch in 2011, over 70 schemes, spread across 2,400 ha containing over 1 million tonnes equivalent of CO2, have been audited and verified and the owners paid.

Fenning Welstead, director of John Clegg & Co, the independent forestry arm of Strutt & Parker, asked how many people know the value of their forests, the land and the biological asset.

“Land is a taxable asset. An accountant would take the total value of the property and subtract the value of the biological asset to arrive at a value for the land. International Accounting Standards (IAS 41) values a biological asset as the total value of the property, minus the value of the land. Where the biological asset is a crop, growth rate charts, future timber prices and discounted rates provide a method of arriving at a value of the biological asset.”

However, using natural capital, valuing a biological asset becomes more complicated.

“Forest Research has made a study of the worth of Welsh forestry resources. Capitalising annual values timber was given a £0.7 billion capital value. In contrast, carbon sequestration (£3.9 billion) and air filtration (£11.2 billion) benefits were calculated to be worth over 20 times the timber values.”

The current forest market situation: “Forestry is a topical asset class for investment and amenity, offering capital protection, capital growth and income. Forestry is the only major use of land to absorb carbon, and timber is a global commodity that benefits the environment. Afforestation projects are popular and modern UK timber processors are efficient. Political uncertainty is not affecting the forestry market and low base rates are expected to continue.

“Land values vary from £1,300 per ha to £5,000 per ha. Pressure from competing land uses will only increase its value. The political interest in forestry and timber has never been higher. If bank rates remain low, forestry performs very well as an asset class, both with physical growth and the underlying land values.”

Tilhill’s timber buying director Harry Stevens explained Tilhill and the timber markets. “Tilhill Forestry provide BSW sawmills between a quarter and third of all sawlogs in Britain. Of the multiple products cut, 60 per cent go to sawmills, 18 per cent to biomass, 11 per cent for panel-board factories, 5 per cent to pulp and paper and 5 per cent to other. All forest operations are undertaken in accordance with UK Woodland Assurance Scheme.”

The UK is the world’s second-largest importer of timber. Currency fluctuations impact product values and raw material prices.

Forestry Journal: At the end of the launch, panoramic views offered from the 17th floor of BNP Paribas’ London offices, of gunmetal grey clouds lashing rain across the city rooftops.At the end of the launch, panoramic views offered from the 17th floor of BNP Paribas’ London offices, of gunmetal grey clouds lashing rain across the city rooftops.

“The FC’s Coniferous Standing Sales Price Index has displayed strong growth over the last 20 years. Last year’s fall is the result of an outbreak of Ips typographus across Central Europe. Sanitation felling of industrial roundwood spruce, which led to an oversupply, should be complete by new year.” If long-term timber markets increase, the upward trend will be reestablished.

Guest speaker Stuart Goodall, chief executive of Confor, spoke of forestry’s current and future outlook: “The timber market is experiencing choppy waters. Over the next 30–40 years, smooth conditions lie ahead.

“2017–2018 saw strong growth in domestic timber prices, both for sawlogs and sawn wood products. Exchange rates were low and prices in Europe were high. In 2018, prices diverged. Windthrow (130,000 ha across Germany), and drought leading to an outbreak of Ips typographus, led to sanitation felling across hundreds of thousands of hectares of Germany, France, the Czech Republic, Slovakia, Poland and southern Sweden. Processing and placing large amounts into the market caused timber prices to drop.

“In 2019, Central Europe experienced similar weather conditions. South Sweden – the biggest single timber exporter into the UK – has not seen the same issues. This is significant for us. Mills in Sweden are reducing production. The Swedes recognise that they cannot keep putting cheap loss-making sawn timber into the market.”

Unlike competitor countries, the UK does not have statistical real-time market information. Instead, harvesting and wood-processing activity and prices are reported a year or more in arrears. Import information is better, though it is unclear what the current picture is.

“The first half of 2019 saw sawn softwood imports rise by 9.5 per cent and prices were lower. Factors clouding the current picture include the impact on sterling of the Brexit deal we may or may not have, stockpiling timber imports, de-stockpiling and more sterling volatility.”

Looking ahead, “Current global consumption models suggest demand for wood and timber is set to triple by 2060. Any country that plants is going to benefit.

“We will struggle year on year to meet climate change emissions-reduction targets. Moving away from simply reducing emissions to the concept of ‘net zero’ creates greater opportunity for tree planting and wood use.

“Planting trees and using wood is a simple low-cost option and a message that has been picked up by climate change activists. Our message to politicians is: ‘Sequestration’ (tree planting); ‘Storage’ (photosynthesis locks up carbon, using timber in house-building locks-up carbon for longer); ‘Substitution’ (use more wood).”

Forestry Journal:

Confor commissioned a report to assess the carbon benefit from forestry and timber in a commercial forest in southern Scotland. “Each year 7.3 tonnes of CO2 per hectare is locked up. An individual’s annual average emissions is less than that. To achieve zero carbon we need to plant 260,000 ha a year. Confor believes 40,000 ha by 2030 is achievable across the UK.”

Looking at political commitments, “Scotland has increased its planting budget. They have a new Forestry Strategy and a confident sector, but local people can be upset with land-use change and we need to engage with them. Since 2014, England has not delivered on planting targets. Politicians say things and do not follow through. Applications can now be made year round, the Woodland Carbon Guarantee offers top-up funding and some local authorities have climate change planting targets. Regionally, forest partnerships (Northumberland) could be the route to achieving more planting.

“Since 2014, Wales has not delivered on planting and there is opposition from local farmers and wildlife lobbies. What funding was available was over-subscribed. There is the will. Politicians need to drive the issue through.”

Brexit has not overtly affected the sector. “There may be issues getting the planting workforce. Of more concern is plant health and protecting our borders. Whatever deal we get, we will leave the CAP.  Without the CAP, UK governments can encourage farmers to plant trees and we expect more funding available for forest management.”

Guest speaker Richard Davidson is an investment manager of 30 years’ experience and a forest owner. “The asset class I have had the most positive experience with is forestry. I became a portfolio investor over time.”

In 2003, Richard tried to buy a beech woodland, or similar, in which to spend time with his family at weekends. Only commercial spruce forests were available. Realising how depressed forest prices were, he bought a 300 ha spruce forest for the same price as two-bedroom flat in central London. Since 2003, the market for forestry has changed (for the better) and so has his portfolio. He has bought 12 and sold eight forests.

Forestry offers value not available in other investment classes. “Organic growth: commercial conifer grows at 5 per cent per annum. I have more timber every year. I don’t get 5 per cent more floor space in a flat. The tax status: tax-free income is valuable. After tax, smoothed forestry portfolio yields are comparable to a real estate portfolio. Forestry income: it is not an annual cashflow payment and must be smoothed out over the lifespan of the forest, working out at (approximately) 3 per cent cashflow yield over the long term, tax free. Real estate gives (about) 5 per cent, which is taxable.

“In 2009, I bought a farm in southern Scotland with 800 sheep. Now it has 860,000 trees and potential interest from a windfarm. This is a higher value-added use of the land.”

For those considering a forestry portfolio, he suggested looking beyond traditional locations where optimum growing conditions mean prices have risen sharply.

“Under a changing climate, conditions in north-east Scotland are projected to get better for spruce. Move down from the hilltop and plant on productive grassland. Land is more expensive, but the trees grow quicker.”

For productive volumes, he suggested diversifying the mix of trees species: “Sitka spruce is not the best timber out there. A mix of conifers provides different cash-flow profiles. Noble fir can produce foliage for wreaths for short-term income. Mixed broadleaves, such as oak, beech or cherry, are longer life cycle products.”

Finally, “Forestry has negatives and positives, including bureaucracy and organic risks. Not enough land is available for all who want to buy forests, although more may become available after Brexit. Be warned, forestry is also an investment that you may fall in love with.”

Peter Whitfield thanked the speakers for their presentations and the guests for coming.

Peter Whitfield invited Tilhill Forestry’s forestry director Tim Liddon to join the panel of speakers for the Q&A. 

Q. I noted the figures for buying and selling. Do they include stamp duty costs? 

A. No. We record only sale price.


Q. What about agricultural valuations and what are these management costs?

A. Management costs tend to vary by property with lower unit costs in bigger forests.

A. Management is a bespoke service and you can tailor the level of management costs to your own requirements. It’s worthwhile investing in management. The more time a forest manager spends on your forest, the better-quality work you should get from contractors and the better the result for your asset.


Q. What are the management costs for forestry?

A. Depending on what you want from your land, management costs vary between £5–10 per ha per year. Selling of timber comes with additional costs of about 1–3 per cent of the timber’s value.


Q. As a representative of a landed estate considering afforestation, can you say more on the different solutions and strategies for pests and disease?

A. Resilience. Depending on where, what soils and how exposed your forest is, some sites may be better suited to planting with a variety of species. Other areas may be suitable only for Sitka spruce. You then rely on genetics where work is ongoing with genomic selection and understanding of the DNA markers for various traits to match differing conditions. Given the faster growth rates of Sitka, we can improve resilience by shortening the rotations so that any one crop is exposed to the environment for a shorter length on time.


Q. We seem to have ambitious plans to plant trees. Do you see tree nurseries keeping pace with the demand to plant?

A. Nurseries are looking to central government for certainty on an increase in planting. This will encourage them to invest.

A. Tilhill Forestry has contract-growing arrangements with a number of nurseries for circa 80 per cent of their requirement. The rest is bought on the spot market. This year, we have seen a shortage of supply due to last year’s weather events and a significant increase in planting. These two factors have increased demand. It will not be a smooth ride but it is doable if we work with government and suppliers.


Q. Can you talk about ash dieback and its impact on the biomass market?

A. Ash dieback is prevalent and noticeable across the whole country. Genetic resistance is appearing. A weakening in the firewood market has been offset by expansion in the biomass market. Any ash not going into firewood will go to biomass.


Q. As a private investor, I find it hard to get clarity on timber price. Other countries, the US for example, have screen-based Bloomberg-type systems.

A. Scandinavia also has real-time indices. We should be more proactive as a processing sector and look at creating some sort of indices.

A. Confor members agree that we need this. Whenever there is a swing on prices, the sector is slow to understand what is happening.  There is nervousness around introducing any system and we may see swings in behaviour as people respond to indices, not trends.  Hopefully, a system will be introduced next year.


Q. What are the prospects for alternative species such as Sequoia sempervirens?

A. Sawmills need critical mass: to know how much timber we will have in advance, to then develop a market for it. If it is a one-off, it will probably go into the lowest common denominator. There are a number of niche markets that will take alternative species and as critical mass of any particular species then a market will develop.