Forestry Bulletin Spring 2015

Our services include: • Forest planning and management • Planting and development of woodland • Forestry investment services • Appraisal, valuation and due diligence • Growing timber insurance and VAT administration Large Douglas fir in woodland, planted in 1933. • Timber harvesting and marketing Market Fundamentals • Forest road design and construction Commercial forestry ownership has proved a stable and resilient counterbalance to • Carbon sequestration equity investment… • Wildlife management As well as the beneficial tax rules applied to UK forest ownership, commercial forest investment is considered to be relatively low risk (as growth is in-part biological), • Tree surveys non-correlated with equities and less volatile than bonds. This gives the asset class • Farm woodland applications an additional diversifying, inflation hedging and risk hedging quality that can be • Fencing and landscaping applied to multi-asset portfolios (source IPD Forestry Index 2014).

The Forestry Property Market The IPD Forestry Index 2014 reports the returns from UK commercial forests… ‘UK forestry investment maintained its superiority over the core asset classes, equities and gilts, with an annualised return of 8.5% over a 21 year timeframe (to Dec 2013).

3 year annualised total returns by region

30 30

600 3 year annualised total returns % p.a. (line) 25 25 500 20 20

15 400 15

10 10 300 5 5

Index value (shaded area) 200 0 0

-5 100 -5 3 year annualised total returns (% p.a.) 3 year annualised total returns

-10 -10 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

North Scotland South Scotland Wales All Forestry Index Forestry Index (3 year annualised return) Mid Scotland North (Source: IPD UK Forestry Index 2014)

The forestry market in 2014 remained buoyant, once nerves steadied following the Scottish Independence Referendum. Both existing and new investors were active in the market. Forest property totalling £82.9 million, and an area of 13,390 hectares was traded in the open market in the UK, in 2014 (Industry Sources). This value was 15% down on 2013. While most transactions were in the open market, an estimated 17% were private, off market sales, a method sometimes used between parties with good, external advice or experience. The average size of properties sold fell to 130 hectares and the number of transactions increased by 30% over 2013, possibly reflecting more private owners taking profit in a strong market. Although top quality timber producing properties have attracted most attention, properties of more variable quality also found a place on the market. Scotland’s share of the market, by value, increased from 69% to 77% and Wales’ share decreased from 16% to 8% (Industry sources). English commercial forests still attract higher prices per hectare than in Scotland, mainly owing to higher prices for the underlying land. This, in turn, reflects the relative shortage of woodland in a more crowded country, as well as proximity to more towns and cities, and hence investor accessibility. Timber Market Lupton Park Estate, Devon. Infected larch harvesting, 2014 The picture for the future UK timber market is one of excess of demand over supply, likely to lead to increased prices, subject to unpredictable macro-economic factors. The prospect of longer term supply shortage has resulted in an increase in the acquisition of commercial forests by timber processing and utility companies seeking to secure strategic supply.

Political and Economic Factors On Land Reform in Scotland, we have yet to see the likely direction of this initiative, when the Bill for Land Reform is published by the Scottish Government, promised before the summer recess. On the supply side, there is a forecast drop in timber supply The main themes of the proposals in the Scottish Government in the UK, starting in the early 2020’s (’50 Year Forecast of consultation paper are: sustainability of land management; Softwood Timber Availability’ - Forestry Commission 2014**) transparency of ownership; viability of the rural economy. – see graph above. Meanwhile, predictions are for increased There is also a proposal for varying the tax treatment of non- future demand, driven by new markets such as wholesale and forest sporting income. Commercial forestry remains a core domestic wood-to-energy markets. and vital part of the Scottish economy and renewable energy Currently timber prices remain buoyant, reaching record highs mix and it seems unlikely that the Scottish Government will in South Scotland in 2014. Prices for standing spruce timber put forward reforms which would cause major uncertainty in are regularly exceeding £30 per tonne (averaged across all this sector. Fountains Forestry has contributed to ConFor’s product sizes), as far north as Aberdeenshire. Prices further formal response to the Consultation Paper. north are correspondingly at their strongest for almost 20 years One of the major macro-economic factors affecting property in real terms. prices is the relative strength of Sterling against the Euro **http://www.forestry.gov.uk/pdf/50_YEAR_FORECAST_OF_ and Swedish Krona and hence the competitiveness of timber SOFTWOOD_AVAILABILITY.pdf/$file/50_YEAR_FORECAST_ imports from Europe. The price of oil and hence the cost of OF_SOFTWOOD_AVAILABILITY.pdf international transport is also significant. Support for new- build housing continues and increases into the medium term and is a consistent theme across the political manifestos ahead of the General Election, construction being a major driver of spruce timber prices in the UK. These factors cannot be predicted but the UK harvesting and processing sectors are as efficient and well equipped as any, internationally, whilst government support for new-build housing continues and increases into the medium term and is a consistent theme across the political manifestos in the run up to the General Election; Construction being a major driver Large Redwood logs from a thinning operation at Kingswood, Devon. of spruce timber prices in the UK. Simon Brent’s dog Darcey provides scaling!

Market Outlook The fundamental arguments for investment in commercial UK forestry assets remain unchanged. Meanwhile, the performance of the UK timber sector, which now includes energy generation, continues to develop and thrive. Natural risks such as disease and climate change need to be kept under review and diversification of species and/or geography is prudent in portfolio construction. Taking all these factors into account, we expect to see continued demand for forests among existing and new investors and increasing interest from the processors, seeking to secure long term supplies.

Tax The tax position for commercial woodland and forest ownership remains unchanged and is an important factor in the freehold market, especially for new investors. Exemption from certain UK property taxes currently provides encouragement for commercial forest and woodland ownership. On average, commercial forests are held by their owners for between 10 and 15 years. Inheritance Tax ‘Business Property Relief’ remains a significant influence and motivation. Tax-free timber income is also an incentive, particularly those purchasing older woodlands and looking for income to supplement pensions. Source: ‘Fountains Forestry – A Guide to UK Forestry Taxation’ available to download at www.fountainsforestry.co.uk New Grant and Rural Payment Systems In 2015, changes required by the EU’s Common Agricultural policy are resulting in major revamping of the grants and rural payments systems in Scotland and England. These are part of a move away from subsidy to environmental enhancement and protection. Scotland The new Forestry Grants Scheme (FGS) is designed around the following drivers: - Woodland creation - Woodland improvement for biodiversity Exwick Wood, , Devon. Douglas Fir, - Low impact silviculture, including ‘continuous cover’ systems planted in 1970, recently thinned (LISS) - Woodlands in and around towns (WIAT) - Restructuring of forestry England - Sustainable management The new scheme is called Countryside Stewardship. The - Plant health scheme priorities are biodiversity, water quality and flood risk Unlike the English system, the FGS does retain some modest and plant health. restocking grants, if the crop requires age restructuring. This There are now no grants towards restocking of woodland, post grant is marginally higher if the restocking increases the range felling, unless the felling is required under a Statutory Plant of tree species, and hence biodiversity and crop resilience. Health Notice. The significant majority of funding available will be targeted Grants for woodland creation and subsequent maintenance are towards woodland creation contributing towards the Scottish quite generous and well worth consideration by landowners, Government target of 10,000ha of new woodland per annum. although the impact on the value of the underlying land Grants announced feature favourable rates for planting conifer should be taken into account. and broadleaf species at commercial densities, although native Woodland creation grants support planting of both conifers as species mixtures, are also supported. well as broadleaves; there are also helpful grants for stock or Finally, the Rural Payments system is being replaced top to for deer fencing to protect new plantations. bottom , resulting in re-registration by every existing land and Grant processing and monitoring is now to be carried out forestry owner in Scotland! primarily by the Rural Payments Agency rather than by the Forestry Commission. All owners must register under the new system if they wish to apply for grants and an FC-approved Wales Management Plan is also a pre-requisite for grant application. There is a 3 month ‘window’ each year for grant applications. The Welsh Glastir grant system remains an environmentally focused scheme which can be of help in implementing In summary, in both countries, grants are in transition and biodiversity or tree health measures , including broadleaf we are still feeling our way. A new layer of bureaucracy, planting. It is of limited use to owners of commercial forests. familiar to farmers, will probably increase the lead times between commencement of a Management Plan, forestry operations and claiming of the applicable grant. No grants are guaranteed; they are competitively awarded, based on a points system.

Certification Plant Health Update Although Fountains Forestry maintains high environmental In both western England and south west Scotland, further standards in all managed woods, we are keen to certify infection by Phytophthora ramorum in larch crops has generally owners’ forests and woods under the been detected around clusters of previously infected sites. Woodland Assurance Standard (UKWAS); this enables the Considerable volumes of infected timber are still to be timber produced from those woods to carry the international harvested in south Wales and SW Scotland for which there Forestry Stewardship Council (FSC) mark; many major is a ready market, albeit it at reduced values. The Forestry timber purchasers purchase only FSC approved timber. Commission continue to issue Statutory Plant Health Notices We continue to review the availability and merits of the UK (SPHN) on infected sites and timber can only be sold to regional grant schemes in preparing Long Term Management licenced processors. The new Countryside Stewardship and Certification Plans for forests which are approaching scheme in England provides funding for restocking of infected harvestable age. sites. Additional sites infected with Chalara fraxinea or ‘ash die- back’ have been identified in 2014-15 with both planted stock and established woodland affected. The infection is believed to have entered Britain on plants imported from nurseries in continental Europe. Nursery stock planted in the past ten years is often infected by Chalara and infection can spread to neighbouring woodland. Progress of the disease continues westwards across the country with recent infections located in Somerset. Unlike Phytophthora sites, the Forestry Commission generally do not issue Statutory Plant Health Notices (SPHN’s) Harvesting infected for Chalara infected sites and woodland owners and managers Larch in Devon, 2014 should decide for themselves whether to fell and remove infected trees. Fountains USA Fountains America has an established forestry management business, managing eastern seaboard hardwood timberland over 600,000 acres and covering states stretching from Maine to Tennessee; it also has a land agency, Fountains Land Inc. This region of the US produces some of the finest renewable hardwoods in world, and markets for its high-grade sawlogs and veneer have always been robust. The main silvicultural Second Lake Forest, Maine 212ha challenge of forestland ownership has always been the ability – (Guide Price £485,000 at current to enter stands early and regularly to remove lower grade exchange rates – April 2015). On products. sale with Fountains Land Inc. Meanwhile, new technologies, global markets and shifting energy policies have changed timber supply and demand chains the world over. While sometimes upsetting local 3) The most active timberland buyers are large, institutional market balances, in the US these changes have benefited investors and they have overlooked the small to mid-sized the timberland owner by providing a diversified low-grade investment opportunities, and marketplace where biofuels now support pulp and other 4) The improved US economy has many investors looking traditional uses for such material. elsewhere for higher returns. These diversified low-grade markets now provide forestland Forestland investment properties in the US include the right to owners with the ability to produce income from thinnings, develop land for various uses, including personal family plots increase yields of higher valued products and shorten rotation and retail subdivision. However, unique to the northeastern periods. region is the opportunity for some investments to be acquired Such positive market changes often push asset values up, as in without the development rights, allowing the investor to the UK; ironically, this is not the case for most small to mid- acquire timberland properties well below the value of the sized (200-800 hectares, approx £250,000- £1,000,000 GBP) standing timber. Both investment types (with our without forest investment properties. There are four primary reasons development rights) can be attractive investment options, for this: especially while supply outpaces demand for the small to mid- 1) Many buyers have overlooked the benefits of strong markets sized properties. for low-grade products; Fountains Land Inc. has a wide range of forest properties 2) Since the recession, investors have been disciplined in available for details: please visit www.fountainsamerica.com their acquisition approach, relying on traditional timberland . Either contact me direct or, alternatively, my colleague Alan fundamentals of growth, ingrowth (transition to higher value Guy in the UK will give you an introduction to the US market. products through management) and price appreciation Michael A. Tragner, President of Fountains America, Inc (over more speculative land appreciation assumptions) in Tel. (001) 802 223 8644 X22 determining investment value; this approach has kept market [email protected] values tied to the asset’s true ability to produce realistic returns;

Some Forest Properties for Sale in the UK

Phaup Forest, Scottish Borders Craigengillan Forest South, Dumfries High Wood, Liskeard, Cornwall, 325.9ha, on sale with J Clegg & & Galloway, 90.7ha. On sale with John 26.2ha, on offer with John Clegg & Co. at a Guide Price of £2,945,000 Clegg & Co. at a Guide Price of £475,000 Co. at a Guide Price of £290,000

To view a larger selection of properties for sale please visit www.fountainsforestry.co.uk

Your Contacts at Fountains Forestry Disclaimers Alastair Sandels a) The views and information in this Bulletin are provided for Investment Director guidance only and do not constitute investment advice. Readers should take appropriate professional advice 07778 141540 before acting on any of the issues raised. b) Fountains Forestry is not a financial advisor and Alan Guy interested investors should consult their own financial Acquisitions & Marketing Manager and tax advisors to check the applicability of the taxation 07876 556132 benefits and the suitability of forestry investment for the particular circumstances.

[email protected] 01295 753 233 www.fountainsforestry.co.uk