Since March this year, the forestry sector, in common with other parts of the economy, has had to deal with the adverse impact of the COVID pandemic. The impact across the forestry sector has not been even, however. Some parts have experienced only a mild impact while others, such as the nurseries, who are vital in bringing on the seedlings for future replantings, have been hard hit.

The Herald: Fenning Welstead, a senior director at the forest agents John Clegg & CoFenning Welstead, a senior director at the forest agents John Clegg & Co

However, as Fenning Welstead, a senior director at the forest agents John Clegg & Co, points out, the demand from potential investors for forest land continues to be strong, and timber prices are holding up. Every year John Clegg & Co, along with the forestry management company, Tilhill, produce a forestry report that analyses demand and supply, and other factors critical to the industry.

That report was still in preparation at the time of writing, but Welstead says that it is already clear that, as is usual for the sector, the demand for existing forests and land suitable for forestry continues to far exceed the supply coming. Covid 19 has also had an influence on sales coming to the market.

“Speaking to farming agents, they all say that the supply of farmland coming onto the market, is well down this year on previous years. This, of course, is driving up prices,” he says.

There are multiple possible reasons for this. One reason Welstead suggests, could be to do with Brexit and the move away from the Common Agricultural Policy (CAP). Potential sellers are waiting to see what schemes the rural payments agencies put in its place, with the different agencies across the UK working up their own individual plans to different timescales. It is anticipated that environmental incentives will play a large part in whatever support is offered to landowners in future, but until more details are available landowners may be holding back from making decisions about bringing land to the market.

The Herald: Kilchrenan, Loch AweKilchrenan, Loch Awe

Another reason for the drop in woodlands for sale, he suggests, is that it is not clear to owners that the cash they could get from selling the woodland could be better placed elsewhere. It is already earning them around nine to ten percent a year, on average, and if they put it in the bank, with today’s low interest rates inflation would eat away at it. Putting it in the stock market is certainly not guaranteed to produce 10 percent per annum or better. So, the incentive to sell just isn’t there, in many cases.

This raises the question of how forestry, as an asset class, can expand. At present Scotland’s forests and woodlands cover nearly 19 percent of the country. If the Scottish Government’s ambitious programme of tree planting comes to fruition, Scotland could have some 21 percent of the country covered in woodland by 2032.

Welstead points out that the Scottish government has been actively increasing the annual woodland planting targets. It had already announced that the current target of 12,000 hectares of new plantings of woodlands a year, would be extended to 15,000 hectares by 2025. Then, in August this year, as part of its ‘programme for government’ it announced that the 15,000-hectare target would be raised to 18,000 hectares of new plantings per year for 2021/22.

The Herald: Ballyoukan , Pitcastle & Pylon BraeBallyoukan , Pitcastle & Pylon Brae

These targets are being backed by a strong incentive grant scheme for new tree plantings, with over £100 million available in grant funding. The sector is already worth £1 billion to the Scottish economy and supports in excess of 25,000 jobs, many of which are in rural communities.

“We are still a long way behind many European countries as far as forest coverage is concerned. Only Holland has less than us, with 11 percent of the country under woodland. Germany has 32 percent, France has 31 percent while Finland and Sweden are 73 percent and almost 70 percent respectively,” he notes.

Climate change is going to be an issue for woodlands going forward. We have already seen cataclysmic forest fires in California and news has begun coming through of huge forest fires in Siberia after two years of record high summers. Forests, of course, have a huge role to play in fighting climate change, with their ability to sequester carbon. However, persistently dry conditions both stress the trees and create major fire hazards.

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That said, Welstead points out that demand for wood and for wood fibre is set to increase well into the future. “We are already seeing new technologies creating new demands for wood fibre. Some of the new sources of demand we cannot even envisage yet, but technologists are actively exploring the use of wood cellulose and fibre for new products.” Add to this the increasing mandating of wood and fibreboard in ‘green’ housing standards and the future looks good.

UK pension funds are already one of the biggest potential new sources of investment in forestry. “Some funds have bought land for woodland planting. The long time horizons of forestry as an investment are ideally suited to pension funds,” Welstead says.

He points out that a woodland of around 10,000 hectares is enough to produce a sustainable physical production of 100,000 tonnes of timber a year into the dim and distant future. “Of course, you have to stagger the age of the trees that make up the woodland, but by replacing felled sections with new plantings, you could keep the woodland going indefinitely.

At £50 a tonne, 100,000 tonnes of timber will generate a revenue return of £5 million. It might cost £1.5 million a year to cover re-planting and upkeep, but that still generates £3.5 million in profit. The question then is, what would investors be willing to pay to achieve that level of return? At an interest rate of 2.5% an investor would probably be willing to pay around £140 million for that return.

“The point is that in a low interest rate climate, the capital value of an asset that generates consistent low risk income, can be quite high. It will also be very sensitive to small movements in interest rates. Forestry, by any standards, continues to be a hard investment area to beat,” he concludes.

For more infromation please visit our site www.johnclegg.co.uk

This article appeared in The Herald's annual review of Scotland's forestry sector on the 24th September 2020.

 

 

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