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‘If you go down to the woods today…” Neil Martin interviews Anthony Crosbie Dawson about investing in timber

This article has been sponsored by FIM Services, for more information on their services click here to find out more.”

With Christmas not far away, our thoughts naturally turn to trees amongst other things. Neil Martin speaks to Anthony Crosbie Dawson, an investment manager at FIM Services who likes to think he can see the wood from the trees. So is now a good time to invest in timber?

According to Anthony Crosbie Dawson, those sophisticated investors on the look-out for a different kind of asset class with a really solid backing, should take a long hard look at wood, or timber as those in-the-know like to call it.

I admitted to Crosbie Dawson that my only experience of investing in woods and forests came from distant memories of celebrities being involved in less than fruitful schemes.

He put that down to grandiose claims from schemes years ago which promised guarantees on forests that were often half-way around the world. The funds he manages are much more down to earth, are all based in the UK, target a respectable 7% return, aim to provide a 3% tax free distribution and are backed by sustainable, real assets. These include both the timber and the land on which they grow. This provides the industry term behind the investment, timberland (no, not the people who sell boots).

Favourable environment

And the case is now compelling he says: “The positive prospects can be judged against increasingly expensive equities, continuing low interest rates and bond yields and uncertainty over the trajectory of inflation going forwards. Trees keep growing and the supply of land is fixed. Throw in the tax advantages, which includes 100% relief from IHT, and there is a compelling case for investors – and their advisers – to consider.”

Currency benefits

What’s more, the fall in sterling has thrown in an extra advantage. Sterling’s recent weakness is, says Crosbie Dawson, expected to provide a long term benefit to UK timberland owners. The argument is based on the fact that the UK currently imports around 80% of its annual timber consumption and weakness in the currency will see the cost of imported timber rise, once deliveries for Q1 2017 start to arrive in UK ports. Once this happens, UK forest owners will increase the price of homegrown timber, thereby improving the returns generated by the asset class.

The argument continues with the view that the price differential between similar grade homegrown UK timber and its imported competition, currently around 20-25%, will rise. This in turn is expected to lead to increased demand from UK processors for standing timber as they seek to exploit the price differential by increasing market share. This provides strong upside potential for UK timberland owners, potential which has yet to be reflected in UK timberland prices. And it’s here, says Crosbie Dawson, where the clear buying opportunity arises for investors.

A growing reputation

FIM has been in the timber business for nearly 40 years and has just started raising money again for its FIM Timberland LP, which is open for subscriptions until 28 February, 2017. This trading vehicle, a limited partnership, has already raised £36m since its formation in the spring of 2015.

FIM manages two other Timber Funds which, says Crosbie Dawson, have delivered excellent returns for investors. They have combined assets of £210m. Both of these are fully invested and the first, operational since May 2010, has returned 11.7% per annum; the second, operational since December 2008, has returned 12.0% per annum. The third fund has the same target return of 7% as the other two funds and plans to pay annual distributions of 3% tax free. It also will have the benefit of 100% IHT relief after two years of ownership.

Significantly, the minimum subscription is £41,360. Crosbie Dawson explains: “Within the known parameters of UK timberland investment, it is perceived to be only of benefit to ultra-high net worth investors. Indeed, to secure economies of scale this is the case, as bespoke portfolios generally commence at £5 million plus. But, FIM promote commingled investment vehicles subject to a minimum investment of circa £40,000, allowing a wide range of investors to access the benefits of a secure, long term sustainable investment, with significant tax advantages.”

Effective structure

Crosbie Dawson points out that the structure of the trading vehicle, a tax-transparent limited partnership (LP) in which partners’ liabilities are restricted to the capital subscribed, is the most tax efficient mechanism for investment into UK timberland. This means that the vehicle is an unregulated collective investment scheme, which has the added advantage of protecting the diversification benefits of timberland by assuring that the fund is unlisted.

This is because unlike owning shares in a company, distributions are not subject to dividend tax, which would substantially reduce the net benefit of cash flow arising from the investment to a top rate taxpayer. Furthermore, any increase in the value of shares in a company would be subject to capital gains tax (CGT), whereas in the LP it is only the realised gain established on the sale of land which is subject to CGT. The increase in the value of timber, which has been by far the largest component of capital appreciation in timberland assets, is not subject to CGT in a limited partnership and provides 100% IHT relief (which would not apply to shares in a limited company quoted on the main market).

The time is now

FIM is on a mission to explain why investors should have some exposure to wood within their portfolio: “FIM is focussed on making the attractions of UK timberland available to a wide investment universe, and has been successful in doing so in a particularly tax efficient structure. The launch of this fund comes at an opportune time in relation to the outlook for timber prices. It will make UK timberland available to investors who may not wish to invest the capital required to acquire a forest directly.”

The trees within the LP portfolio are spread over 3,000 hectares within nine properties (much of it in Scotland). This minimises the main risk to timberland owners, other than fire and windblow (both covered by insurance), which is damage from pests and disease, both of which are uninsurable events.

And in case you’re wondering, the trees in question are spruces. These not only grow fast, but are preferred by the commercial market (main-use is the construction market) and take 35 years to grow. However, there is a ten to fifteen year harvesting opportunity, when the tree is aged from 35 to 50 years, which means the fund can choose to sell the wood at the optimum time in the market.

Altogether now, TIMBER…!

 

 

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