In recent years, investors have been offered various forestry schemes through unit funds. It is an area that should be considered with great care because such schemes are long-term investment vehicles with unknown variables.
Based on what has been achieved by forestry funds in Britain and Ireland, the industry consensus for the real rate of return, net of inflation, is between 4 and 7 per cent per annum. Since Mr Charles Haughey's 1969 Finance Act, profits on the occupation of woodlands managed on a commercial basis have been tax-free. Despite that incentive to invest, forest cover is still only 9 per cent in Ireland - less than one-third of the EU average. Commercial foresters also benefit from a planting grant and an annual premium payment to compensate for loss of income. Land suitable for forestry has an inherent value but its market value is strongly tied to the value of grants it can generate.
The latest initiative in forestry investment is a new product from Irish Forestry Services, a forestry investment company, which is offering a 9.6 per cent compound annual return over a ten-year term. The return is 5.1 per cent when adjusted for inflation. The Forestry Investment Plan is a departure from previous funds because it offers a shorter investment period and it has a life-assurance element attached. Investors may invest up to a maximum of £100,000 (€127,065), with the guarantee that their capital sum is assured under a group life risk basis through Canada Life. Shares are marketable, although life cover would cease once the share was transferred to a new party. Irish Forestry Services manages forestry assets on behalf of 6,100 private investors who joined during its six previous Irish Forestry Funds.
The plan expects to raise £1 million to buy bare land for planting and semi-mature forests. It will then sell this land in 10 years. The managing director of Irish Forestry Services, Mr Declan Kennedy, is behind the plan and says the fund will capitalise on the increasing demand for semi-mature woodlands and the overall development of the secondary market for woodlands in Ireland. Of course it is impossible to predict what the market will be like in 10 years. Ireland is a small producer of timber and increasing amounts are being imported from Eastern Europe, especially the Baltic states.
Land prices are another factor to consider. According to Mr Kennedy, the price of land suitable for forestry peaked at around £2,000 per acre one year ago. It is currently fetching £1,800 to £1,900 an acre, the same price bare as semi-mature. Apart from competition in the market, the biggest risk to Irish plantations is windblow, according to independent forestry consultant Mr Henry Philips. In 1998, the northwest lost two years of felling in bad storms. "Although historically prices have kept pace with inflation, and most analysts believe this pattern will continue, prices fluctuate over time," Mr Philips said. He added that the degree of fluctuation can impact dramatically on the financial return, especially when foresters cannot afford to hold onto the crop and risk loss through windblow.
