Choosing to Invest in Timber

March 25, 2010 - PRLog -- As the demand for timber from China and other markets continues to rise lumber prices are rising accordingly. Elsewhere countries are belatedly realising this and protecting their rainforests from destruction.

In recent years returns on forestry investments have been excellent. According to the UK based Investment Property Databank’s UK Forestry Index forestry outperformed bonds, shares and commercial property over the medium term and has a five year return running at an annualised rate of 16.2pc. While this is great news the long term figure is set at a more realistic annualised return of 5.2pc.

From 1995 to 2003 timber prices fell sharply following a flood of low cost imports from the Baltic States. However the relative movement against the trend of the market underlines the idea that a timber investment could bring some important diversification to an investment portfolio.

There are two basic choices when deciding to invest in timber. The first option is to buy a parcel of land, extracting a generous grant from the Government in the process and enjoy a financial return once the timber is ready to be harvested in a decade’s time.

The second option is to buy funds which invest in wood. Funds buy the land, apply for the grants and manage the land on an investor’s behalf. This is certainly the more practical alternative although the idea of owning a forest is definitely the more appealing option.

Funds in the UK include Four Winds Capital Management, which runs the Phaunos Timber Fund or the smaller First Steller Forestry Fund. Funds over in Ireland include Greenwood Management and the Irish Forestry Unit Trust.

The third and possibly cheapest option would be to consider iShares timber and forestry EFTs, which invest in a group of stocks closely invested in timber. Typically those without the money to buy land or funds decide to go with this option. They have a low annual charge plus other costs of 0.55pc and can be purchased through a stockbroker.

For those who want to invest in timber there is no shortage of choice but the choices can be bewildering so the old rule to research carefully before committing to anything applies in this field especially.