IPD, the world-leader in commercial real estate performance analysis services, today released results for its UK Forestry Index, showing that an investment in forestry would have far outperformed all asset classes in 2007.

In the 12 months to December 2007, forestry in the UK returned 31.6%, far in excess of returns from equities, bonds and commercial property which during the same period earned investors 5.3%, 6.4%, and -3.4% respectively.

Timber prices, which surged 46.3% from March 2007 to March 2008 and were 66.4% higher in March 2008 than in March 2006, were the main driver for forestry's strong performance.

Alastair Sandels from Fountains, one of the sponsors of the index, said: “Commercial forestry returns continued to recover strongly in 2007 from the low of 2002, raising the long term annualised return to 5.1%. The principal return drivers of tax treatment and timber price underpinned by the emerging wood energy sector, continued to support capital growth into 2008, despite the uncertainty caused by rising energy costs and a reduction in housing starts. The asset class is characterised by long-term, low-risk, low returns, providing risk mitigation for investors. Wood is a sustainable green product and in the long
term demand will outstrip supply''.

Still, the range of returns varied greatly between the best and worst performers. Plantations in the bottom 5% achieved three year annualised returns as low as 2.3% per annum, whereas forests in the top 5% achieved three year annualised returns of 36.4%.

It should also be noted that when viewed over a 15 year period, forestry remains the weakest performer of the four asset classes. However, it has also consistently proven to be less volatile than equities.
These characteristics along with tax considerations, continue to make forestry an attractive investment for any multi-asset portfolio attempting to reduce risk through diversification.

Substantial fiscal advantages available to the investor through investment in forestry, include the fact that income from timber sales in the UK is free of Income and Corporation Tax and growing timber is exempt from Capital Gains Tax. Further, after two years of ownership, commercial woodlands qualify for 100% Business Property Relief from Inheritance Tax.

source : IPD