The significant drop in the value of Sterling since the Brexit vote in the summer (a fall of 15 per cent against the Euro between 23 June and 31 October 2016) is expected to be of material long term benefit to UK timberland owners. The UK imports circa 80 per cent of its annual timber consumption and weakness in the currency will see the cost of imported timber rise, once deliveries for Q1 2017 start to arrive in UK ports. In turn, this will allow UK forest owners to increase the price of homegrown timber, thereby improving the returns generated by the asset class.
The price differential between similar grade homegrown UK timber and its imported competition, currently circa 20-25 per cent, will rise. This in turn is expected to lead to increased demand from UK processors for standing timber as they seek to exploit the price differential by increasing market share. This provides strong upside potential for UK timberland owners, potential which has yet to be reflected in UK timberland prices, providing a clear buying opportunity for investors.
As well as a positive short term outlook for timber prices, the long-term outlook suggests strongly rising demand as more houses are built in the western world and consumption rises significantly in the developing world. A fascinating fact is the pitifully low consumption per capita in the developing world, particularly in the two most populous nations, China and India. Compared to the western world, where consumption of timber products annually is one cubic metre per capita, annual consumption in China is much lower, at 0.4 cubic metres per capita, and in India it is infinitesimal at only 0.05 cubic metres per capita.
Combined with a drive for a global reduction in carbon footprints, with timber being a major beneficiary over other building materials, the outlook for a significant increase in consumption is positive.
The well-known benefits of investment in timberland will be further enhanced by rising timber prices.
Timberland has provided competitive returns. FIM runs two established Timber Funds, both of which are fully invested. The first, operational since May 2010, has shown a return of 11.7 per cent per annum. The second, operational since December 2008, has shown a return of 12.0 per cent per annum.
These returns are particularly beneficial to UK taxpayers, as they are largely tax free. Timberland is probably unique in this context, and is thus favoured by high rate tax payers. Returns from timber are tax free. There is no liability to income tax or capital gains tax. Further, the business qualifies for 100 per cent relief of Inheritance Tax (IHT), once held for two years.
The IHT relief gives business owners great flexibility to keep the asset, receiving tax free annual distributions themselves in the knowledge that the investment will be outside their taxable estate, or to transfer the asset to the next generation at a time to suit themselves.
The IHT relief arises from a proper trade in a real asset, owning freehold land and growing timber, which provides a guaranteed increase in value on an annual basis (due to the biological growth of the trees). In turn, both components of the trade give strong protection from inflation. Land is a secure and fixed commodity, whilst timber shows strong correlation to inflation, providing long term security of capital. Inflation is expected to increase in the UK in the coming months and years, with the weakness in Sterling and resultant rise in the cost of imports being a key contributing factor.
Within the known parameters of UK timberland investment, it is perceived to be only of benefit to ultra-high net worth investors. Indeed, to secure economies of scale this is the case, as bespoke portfolios generally commence at £5 million plus. But FIM promote comingled investment vehicles subject to a minimum investment of circa £40,000, allowing a wide range of investors to access the benefits of a secure, long term sustainable investment, with significant tax advantages.
FIM Timberland LP
FIM are conducting a third fund raise for this established trading vehicle, which has to date raised £36 million. The LP has a diversified portfolio, of over 3,000 hectares in nine properties, minimising investment risk. The main risk to timberland owners, other than fire and windblown, which are covered by insurance, is damage from pests and disease, both of which are uninsurable events. However, diversification of geographic locations and of age classes within the forests owned by the LP helps to mitigate this risk
- has a target return of 7 per cent;
- plans to pay annual distributions of 3 per cent tax free;
- will provide 100 per cent IHT relief after two years of ownership;
- has a minimum subscription of £41,360;
The structure, a tax transparent limited partnership in which partners’ liabilities are restricted to the capital subscribed, is the most tax efficient mechanism for investment into UK timberland. Unlike owning shares in a company, distributions are not subject to dividend tax, which would substantially reduce the net benefit of cash flow arising from the investment to a top rate taxpayer. Furthermore, any increase in the value of shares in a company would be subject to capital gains tax (CGT), whereas in the LP it is only the realised gain on the sale of land which is subject to CGT. The increase in the value of timber, which has been by far the largest component of capital appreciation in timberland assets, is not subject to CGT in a limited partnership and provides 100 per cent IHT relief (which would not apply to shares in a limited company quoted on the main market).
The LP is managed by FIM, who have nearly 40 years’ experience of managing comingled forestry investment vehicles for a wide range of investors. Within their area of expertise is an established, proven mechanism for providing a degree of liquidity within each Fund for those requiring an exit.
Anthony Crosbie Dawson explains further: “FIM is focussed on making the attractions of UK timberland available to a wide investment universe, and has been successful in doing so in a particularly tax efficient structure. The launch of this fund raising, at an opportune time in relation to the outlook for timber prices, will make UK timberland available for investors who may not wish to invest the capital required to acquire a forest directly.
The attractions of a sustainable real asset, encompassing land and timber, with positive prospects will be judged against increasingly expensive equities, continuing low interest rates and bond yields and uncertainty over the trajectory of inflation going forwards. Trees keep growing and the supply of land is fixed. Throw in the tax advantages and there is a compelling case for investors to consider”.
Anthony Crosbie Dawson
44 (0)1451 843096