Amid a period of much turmoil (political and otherwise), the UK Forest Market Report 2022 was launched. But it also raised some interesting questions, as FJ found out at an event held in Edinburgh.
THE list of geopolitical factors impacting on world affairs – and forestry – appears to be getting ever longer. There’s been Brexit, a pandemic, war in Ukraine, and now, in all likelihood, a global recession – and that’s just to name a few.
It was in this atmosphere then that, once again, Tilhill and Goldcrest Land and Forestry Group launched the UK Forest Market Report for 2022. In its 25th year, the report’s headline figure was that woodland values had risen by at least 15 per cent compared to 2021, driven by increased demand for timber assets.
However, as guests found out at two launch events in November – one in London and the other in Edinburgh – there is more to the current situation than meets the eye.
READ MORE: UK Forest Market Report 2021: Another record-breaking year for industry
Xander Mahony, head of forestry investment at Tilhill, and Foresight Sustainable Forestry’s Robert Guest were among those tasked with providing an insight into 2022’s theme of ‘Timber: The Climate Commodity?’.
But the Scottish event, held in the stunning surroundings of the Signet Library, began with an introduction from John Lambert.
“The wider benefits of trees and woodland to our society are now at the forefront in the fight against climate change – and as such are being ever-increasingly recognised,” one of the three founding partners of Goldcrest LFG said. “The report confirms another robust and strong performance with a large increase in capital values. But I believe it is important to consider the political and financial backdrop of the last 12 months, which helps to further underline the value and importance of this bespoke sector.
“The financial effects of Brexit are now being realised. The taxpayer has at last woken up to the cost of a global pandemic.
“Rising costs; a volatile stock market; a big swing in the gilt price; weak Sterling; a cooling of the residential market; a new monarch; three prime ministers and a similar number of chancellors; Ukraine has been invaded; numerous mini-seasonal budgets.
“We may, or may not, see another Scottish independence referendum in October.
“We have no control over these factors. What is certain is that, if properly looked after, our commercial timber trees continue to physically grow at five per cent per annum.”
So, that was a snapshot of the picture at large, but what exactly had it all meant for commercial forestry? Handing over to Xander, the findings of Tilhill and Goldcrest were laid bare. A total of £195 million of commercial forestry was sold in the UK, which was down on 2021’s £200.4m (by three per cent). However, the point was made that if you include the ‘off-market transactions’ – i.e. the ones kept away from the “prying eyes” of Tilhill and company – then 2022’s value is likely to have exceeded £200m.
Scotland, once again, saw the most business, making up 84 per cent of the recorded sales (Wales amounted to 13 per cent and England just three per cent).
However, it was the third year running where the value was around £200m – and Xander was keen to stress the context here. Between 2000 and 2004, the annual average was less than £20m.
“While we have got used to this £200m per year market size, that’s ten times what it was 20 years ago,” Xander said, as he detailed the figures were in spite of the number of transactions dropping by 15 per cent (from 67 to 57), and the volume of stocked hectares had decreased to its lowest level since the financial crash of 2008. This stood at 6,900 ha, having been as high as 10,400 ha in 2021. “While I wasn’t in forestry that year, I was in the financial markets, and I imagine that was more of a demand-constrained year. But this year it has not been constrained by supply.
“The kind of people who are buying are not being impacted by the current cost-of-living crisis.
“When we put the data in this year, we saw that most of the property values were similar to 2021. There has not been a wholesale shift upwards. We had a few outliers but they have not affected the data as much as the fact there was very little sold at low valuations.
“My initial reaction when the data was spat out was that there would be a number of deals on it held up by COVID. But that wasn’t the case.”
Over the course of the last year, Xander said, more resources had been poured into monitoring the commercial planting land. This has also included steps to be “stricter” in terms of what is considered to fall under this definition. For instance, if it’s in a national park, it is unlikely to be prime conifer-planting land, and therefore would fail the test.
A total of 31 land transactions with a value of £65.3m were made in 2022, up 23 per cent on last year’s £52.1m. The average cost had risen to £16,475/plantable hectare across the UK, an increase of 50 per cent on 2021’s figures. This, the report added, showed investors were “putting trust” in the future timber and carbon markets – the latter seeing a fourfold increase of registered projects in the last two years.
Scotland continued to be the dominant force in planting land, accounting for 85 per cent of the market by value and also experiencing the highest increase in price. Soaring 73 per cent from £9,900/ph to £17,200/ph, it was well above the 54 per cent increase observed in 2021. Wales also saw a rise in that metric – from £10,000/ph to £12,000 – as did England, but it was still well short of its 2020 total. At just over £18,000/ph, that remains the highest figure for all three nations in the last three years. In 2022, however, prices were around £15,000/ph.
“We’ve seen a lot more value this year,” Xander said. “But again we have seen less area and are still struggling to get the supply. I believe this is because we lack a coherent land-use policy in the UK. We’re a land-constrained country, but I worry this ‘right tree, right place’ mantra is often used to say we shouldn’t have any non-native species anywhere.
“As I said at the start, it has been another year of forestry gains. But we are now heading into an uncertain economic climate.”
By the end of Xander’s talk, guests were well versed in the pounds and pence of it all. What followed next was three separate discussions on the wider issues – and changing approaches – to forestry investment.
Fenning Welstead, a partner at Goldcrest, opened the following presentation with a picture of Loch Katrine. In the 19th century, this was identified as a source of water for Glasgow, at the time suffering from a lack of water. This, Fenning said, could be regarded as natural capital and 160 years later it continues to quench the city’s thirst.
Projects like this – as well as the control of smallpox, the COVID pandemic and other events – show that humans have managed to take some control of nature, he said.
“But really only in ways that protect us as individuals. We haven’t really done anything to protect nature yet and the dawning realisation that has brought us all here is we need to ensure nature survives itself.”
One of the world’s relatively recent developments, he said, was the reliance on materialism. We have created a market where we make things just to make them – like the fashion industry. This is, Fenning argued, unsustainable and we no longer have Loch Katrine to go to for the next environment break.
All of this comes back to land and the factors influencing the UK forestry market. These include: the ownership of land, the fact the UK continues to import 80 per cent of its timber, and the desire for positive environmental PR.
“We are growing commercial timber because it’s easy to harvest, it’s predictable on its yield and its timescales. But we’re criticised because the forest floor is a bit bad. Look at a farming floor, it’s just as bad. We are both growing a fundamental product we need every day.”
Speaking about rising interest rates, Fenning said he believes investment in forestry is not going to slow down. “The good thing about land is that it is not going to disappear.”
Moving on to discuss how to deal with deer, fencing and the like, he made the point that one effect of the growing carbon market could be that it leads to better management of broadleaved woodlands.
“There is a huge future ahead for forestry but we need to be aware of the risks.”
The next two presentations came from guest speakers, who were focused on how forestry investment is changing, and the solutions on offer. Both weighed heavily on the “complex” system of carbon credits.
First up was Robert, who outlined ‘natural capital alpha’. In brief, this was designed to translate the “apparent increase” in the risk-free rate of UK forest assets into a high cost of capital. That is essentially to say: how investors make more money from forestry.
“We’re really proud to be supplying more timber into the UK economy. That’s the main thing we do. If we use our land sustainably, can we generate a natural capital alpha return?”
Outlining how FSF is attempting to convert its stock of ‘ecosystem and abiotic services’ – such as food – into something that benefits both business and society, he showed how the value of environment can be broken down into ‘four realms’. These are: land, fresh water, ocean, and atmosphere.
There is, Robert said, a traditional approach to investing, but FSF is interested in the sustainable approach. This offers better opportunity to manage physical, transition, tax and social risks.
“If we don’t look after our environment, we can’t generate a financial return.”
Giving a case study from a Perthshire estate, Robert showed how sustainable investment in the 2,160-hectare site had seen its uses diversified – such as the introduction of holiday lets – and space assigned for afforestation.
After spending some time taking guests through the value of the Science Based Targets initiative (SBTi), Robert closed by outlining the need for business to diversify commercial income streams.
“We really encourage people thinking about a rewilding project to throw some timber into the mix. We want to leave land in a better state than when we start to manage it. People should always be thinking about their legacy.”
Daniel Bass, rewilding service lead at Ecosulis, an ecological consultancy, argued rewilding has swept in in recent years to provide fresh ideas and a scientific footing for a concerned society, replacing the “apocalyptic” climate collapse narrative of the 1970s.
Now, he said, there are several rewilding approaches, including ‘passive’ – where human management is withdrawn – and ‘assisted’, where species are introduced. Regardless of the branch, it has become rather popular.
Unlike other areas of forestry, however, it hasn’t been entirely clear how investors could make money. That was, Daniel believes, until now, with the upcoming launch of Ecosulis’ ‘Nature Impact Tokens’. On the face of it, these are a little like NFTs – although that is perhaps an unfair comparison – and are due to be released next year.
They will enable corporate buyers to own a stake in ‘verified nature recovery’ and should go some way to derisking greenwashing allegations thrown at investors, Daniel said.
“The science is robust and there’s a social movement growing. How can it be adopted across more land, with a market flow that benefits all parties? We want to apply rewilding principles to attract change and use disruptive innovation to finance it.”
Data for the tokens would be collected using a number of different measures, then given a quality ranking – gold, silver or bronze – that helps to clarify the risks and returns. Investors will be able track their token online.
“The tokens offer a way to report positive commitment and the opportunity to buy carbon credits for any ecosystem recovery they have made possible.
“As we move into the post-Brexit era, there’s an opportunity to rethink and re-evaluate nature finance.”
With the end of Daniel’s presentation, the speakers were all invited back onto the stage for a Q&A. Rewilding, timber prices, and forestry's image were among the topics discussed.
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