Money really can grow on trees

With the endless talk about private equity these days you could be forgiven for thinking it must be the only sensible investment out there. Not so. In fact some of private equity’s biggest players (think Guy Hands) have recently been putting their money into something much more prosaic — trees.

Until a few years ago, British forestry was usually seen as just another way for the market to separate fools from their money: timber prices had been in freefall for years thanks to cheap imports from Scandinavia and Eastern Europe and a fall in domestic processing capacity. They have been recovering slowly (up 13 per cent in the last three years according to the FIM Timber Index) but even now are still only half of their 1996 prices. But that shouldn’t last long, because the timber story is no different in essence to every other commodity story you’ve heard over the last five years: limited supply meets rapacious demand. As China and India continue to grow, they’re going to need a lot of timber — for houses, for furniture, for newspapers, for books, for restaurant menus. Anything that we use wood for, they’re going to want it for too — and Asian demand will drive global prices.

Elsewhere, trees are also coming into their own as a renewable biofuel — a fact that plays strongly to Britain’s new obsession with green energy. Plans are afoot for a large number of biomass projects that would create domestic demand for huge quantities of low-quality timber converted into pellets to burn. Three are already under construction.

So the timber price is rising globally. That’s good for investors. But there’s more to forestry investment than just that. The value of forestry land itself is also rising.