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Wednesday, 16 December 2015 14:34

Expansion in the Forestry Sector Featured

AERIAL IMAGE OF SITKA SPRUCE PLANTATION AERIAL IMAGE OF SITKA SPRUCE PLANTATION

Forestry investment blossoming in face of data dearth Read More

There is going to be significant expansion in the forestry industry in the coming years

If you’re thinking that commercial forestry may be the intelligent, low-risk, long-term, green investment alternative to the cyclical cheers-and-tears of the amnesiac property market, the good news is you’re probably right.

The bad news is so are thousands of others.

Private sector investment is driving the expected doubling of Irish timber production to 6.4 million cubic metres by 2028 while delivering enviable returns off some of Ireland’s poorest land – and the lion’s share of investors are classified as “farmers”.

Approximately 750,000 hectares, or about 11 per cent of the State, is under forestry. Already the highest level of cover in more than 350 years, it is trending towards 17 per cent cover by 2030: the percentage deemed necessary to create a domestic international-scale forestry industry.

From a minimal private ownership base just 40 years ago, 47 per cent of Ireland’s forests are now privately owned. The remainder is owned mostly by Coillte, the State-owned forestry company, that will only sell land under exceptional circumstances.

The total value of Irish forestry and forestry products to the economy is €2.3 billion, supporting almost 12,000 jobs while playing a pivotal role in climate change mitigation. But what does it offer the investor?

Principally, a low risk to return ratio, a largely negative correlation to stock market indices, uber-generous grants and biological growth which, unlike capital gain, is not swayed by economic whim.

However, a planting cycle of up to 35 years (for “green land,” as opposed to semi-mature plantations), a dearth of publicly-available data on forestry-driven capital gains, along with demand for suitable land lapping supply, keeps many non-connected would-be investors at bay.

Recent delays for retail investors looking to recover up to €30 million invested in nine 10-year forestry plans between 2002 and 2005 haven’t helped.

An industry collapse in 2011 just as payments started to fall due saw investors in Irish Forestry Funds having to hang on longer than expected. Just recently the 10,000 acres of semi-mature trees were sold to a European private equity fund and people are receiving their payments, although the returns are less than the initially projected 8.5-9.6 per cent per annum figure.

“There is real scope now for private investment, but forestry is a long way from being in the accepted options that most people would consider for an investment, which is something we want to change,” says Maurice Ryan, timber marketing manager at Green Belt, Ireland’s largest private forest management company - Irish Forestry Investment

It manages more than 120,000 hectares of forestry in Ireland for private clients, investors and pension funds, but it can also help locate and advise on potential forest land purchases.

“Very often when we know of people who are looking to purchase land, such as 20 or 50 acres, we can then target that through our network of foresters around the country.”

Though he concedes the lack of suitable, available land for forest planting is a “concern”, nonetheless about 7,000 hectares is planted each year in Ireland.

Neither does a famine of forest sales strike the viewer upon visiting forestsales.ie – “pretty much the shop window for forestry in the country”, according to founder Paul Lafferty.

At the time of writing there are 231 forests listed, from 14 acres to over 400, across the four provinces. Connacht, at 128, unsurprisingly makes up more than half of these, leaving Munster, Leinster and Ulster, respectively, in the dust.

Working in the industry since the late 1980s, Lafferty says one of the main reasons for the lack of private investment companies focused on the forestry sector is that the taxation system in Ireland has traditionally been “geared so that farmers who own forestry are exempt to a certain level”.

Farmers make-up a towering 86 per cent of private investors – at least in the eyes of the Revenue Commissioners – though Budget 2016 should help loosen that stranglehold.

“To turn that on its head, you could say that 86 per cent qualify as farmers. But it may not be just money from farming that is going into the forestry [that is, through the farm business, from friends, relatives or business connections]…They are not all everyday farmers, let’s put it that way.”

While regular returns from Irish forestry plantations are routinely cited at between 5 and 6 per cent, Lafferty says that does not take into account how much forestry land prices have risen over the last 20 years.

Although Ireland’s soils and climate can grow many commercial tree species considerably faster than our European neighbours, remarkably no publicly-available records are kept which factor in capital gain with forestry returns.

In the UK returns have proven to be the envy of many property investors. According to London-based Investment Property Databank, its 2014 UK Annual Forestry Index returned 18.4 per cent. Median annualised returns from 2004-2014 came in at 15.75 per cent, with an 8.9 per cent annualised total return achieved since 1992 when the index originally came into being.

Most tellingly, the UK index is calculated from private sector coniferous plantations of mostly Sitka spruce – the same species occupying more than half of Ireland’s forest area.

“The market for young plantations is only developing in Ireland, so there is no similar index in place to estimate returns here,” says Donal Whelan, technical director of the Irish Timber Growers Association.

Since 2005 the association has compiled a private roundwood price database, supplied to its own members. However, it is now launching a roundwood price information initiative called the Wood Price Quarterly that will be available to growers to inform them of prices being paid in the market for standing timber from forests.

The project will work with the forestry department of the school of biology and environmental science at UCD, confidentially compiling the price information which is sourced from timber growers and their forest managers. Curiously, data on capital gain in the Irish industry looks set to again be overlooked.

“There is going to be significant expansion in the industry over the coming years and virtually all of the increase is going to come from the private forestry sector,” says Whelan. “In order to attract landowners into forestry there are grant schemes available that cover the costs of the initial planting. After that, the annual premium scheme allows landowners to be paid an annual income for 15 years. It’s basically there to reimburse income forgone from agricultural activities on that land.” Spending commitments: Forestry in Budget 2016 Budget 2016 provides €113.8 million for forestry development, while the Department of Agriculture says it is committed to maintain spending at €110 million for each year of the State-funded 2014-20 Forestry Programme.

Almost 90 per cent of all funding will be directed towards afforestation and the building of forest roads; the former providing for 7,000 hectares of new forestry in 2016, with the latter supporting 110km of forest roads to be built.

The grant rate for establishing forests has increased by 5 per cent across all planting categories so that the entire cost of establishment is covered by the grant.

Secondly, non-farmers are now entitled to the same premium rate as farmers, paid each year for 15 years. Non-farmers previously received, on average, approximately one third of the rate paid to farmers. In tandem with land ownership and availability, it was one of the main reasons for all the “farmers” owning commercial forests.

“The new forestry programme has restructured the forest roads scheme,” a department spokesperson said. “In doing so, the grant rate has been increased by 14 per cent. Financial support has been provided for special construction works, and additional funding has been made available for the construction of bell mouth entrances.”

Crucially, Budget 2016 also removed forestry income entirely from the “High Earners Restriction” for active foresters and farmers. This means that the profits earned from clear-felling will not be subject to income tax, whereas previously it was applicable for returns of more than €80,000.

Article appeared in the Irish Times, Tuesday, December 15th, 2015. Written by Jamie Ball

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