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Where Money Grows on Trees

8th June 2015

The Economist, May 2015

The Economist, May 2015

The Economist, May 2015

A recent article in the Economist highlights why investors who have backed forestry have seen positive financial returns that outcompete other financial instruments. EcoPlanet Bamboo was built, in part, to overcome some of the barriers associated with traditional forestry investment, and provide a triple bottom line company that not only produces competitive financial returns for partners and stakeholders in a tangible time frame, but delivers on quantified and independently accredited environmental and social benefits. If grown and managed sustainably, certified bamboo plantations can not only provide an alternative fiber for timber dependent companies, but be a socially responsible investment.

INVESTING IN FORESTS

The Economist May 30th 2015 | From the print edition

GREEN-FINGERED folk who invested in British forests over the past decade did better, on average, than those who planted their cash in more obvious places, such as stocks and bonds. According to the IPD UK Annual Forestry Index, a sample of 133 commercial forests in Britain, forests returned 18.4% last year and have averaged a staggering 21% a year since 2010, easily outgrowing the FTSE 100 share index (which returned an average of 7.7%) and commercial property (which made 10.9%).

Why the lush returns? For one, timber prices are on the up, making the land used to grow trees more valuable too. Though an irregular source of income (your average tree needs 30-odd years to grow), timber sales alone account for returns of around 2-4% a year, according to MSCI, an equity-index firm. But the root of the forestry boom is overwhelming demand from investors who want to get their hands on land, says Mark Weedon, MSCI’s head of alternative investments. Most private forests belong to wealthy families who want safe places to store their capital, alternative sources of income as interest rates remain low and who (especially since the financial crisis) prize assets they can touch and sniff over paper promises.

Forests also enjoy overgrown tax breaks: their owners pay no capital-gains tax for growing timber and no income tax for selling it. Like farmland, forests allow owners to pass on wealth without paying inheritance tax. All this has created a market in which a growing number of buyers chases a limited supply (less than half of Britain’s 3m hectares, or 7.4m acres, of forest are “investment grade”, and most rarely changes hands).

Thanks to the growing renewable-energy market and the subsidies that come with it, smart investors are now getting even more bang for their bark. The Grosvenor Estate, which owns around 2,300 hectares of forest across Britain, recently invested in biomass boilers, which turn offcuts into energy. And sawmills are getting better at using poor-quality wood, meaning less timber is wasted.

Woodland will continue to do well for a simpler reason, believes Alastair Sandels of Fountains Forestry, a forest management company: Britain doesn’t have anywhere near enough trees in the long term to keep up with demand. Over half the country’s timber is imported. The government’s Forestry Commission last year warned that supplies may start to decline from around 2030 because not enough new forests are being planted. Bad news for squirrels, but good news for forest owners.

Investors should remember that trees can fall as well as rise. As with any frothy asset, forests are unlikely to maintain their steep trajectory forever. The strengthening pound and cheap oil could reverse the upward trend of British timber prices as imports become more attractive. A weak economy would slow housebuilding and thus timber demand. And forests’ sacred tax-breaks could be pruned: the Scottish government is exercising its new powers over property transaction taxes and some believe its reforms may touch forests next. With so much uncertainty, buying forests may be best left to those who can afford to wait out the natural cycles.

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The Economist, May 2015

The Economist, May 2015