RISING TIMBER PRICES HELP DRIVE STRONG RETURNS FROM FORESTRY

UK forestry investment returns have been impressive in recent years, underpinned by rising demand for domestic timber. The weaker pound has made imports more expensive while the use of wood in biomass and construction continues to rise.

Between March 2017 and March 2018, the standing sale price of timber increased by 28% and sawlog prices by 19%, according to the Forestry Commission.

From an investment point of view, the sector driven by increasing timber production and responding to the demand for materials. There are also concerns over the future availability of timber. The Forestry Commission forecasts a 30% decline in timber availability after 2030 in the UK, with not enough trees being planted to meet the expected demand for wood in the long term. This trend is likely to drive further increases in timber prices.

Currently, the UK imports more than 80% of the wood it consumes, according to Confor, the forestry trade association.

Total returns for UK forestry investment in 2017, the latest available data, were 13.9%,

according to the IPD UK Forestry Index, an increase from the 9.9% return seen in 2016. The three-year annualised total return for 2017 was 11.6%.

Returns to investors in forestry are made up of sales of timber (standing or felled), sales of other goods and services, increases in the value of the woodland, and the net income from subsidies. Investor costs are made up of employment costs and other purchases.

Strong investment performance has been driven by increasing timber prices, but also by rising land values over the longer-term. Knight Frank’s farmland index for England shows a 45% rise in farmland values over the last decade, while in Scotland, values climbed 54% over the same period.

A growing desire among investors for tangible assets which offer positive real rates of return, as well as a favourable tax status, has helped underpin demand for forestry investment. Currently, 73% of the 3.2 thousand hectares of woodland in the UK is privately owned, Forestry Commission data shows.

After two years commercial forests are entitled to 100% business property relief and sales incur no capital gains tax. In addition, standing timber carries relief from inheritance tax.

Given the long-term nature of forestry investment, and that the supply of forestry for sale in the UK is limited, the likelihood is that a relatively small transactional market will continue to support and enhance capital values over the medium to longer term.

“ STRONG INVESTMENT PERFORMANCE HAS BEEN DRIVEN BY INCREASING TIMBER PRICES, BUT ALSO BY RISING LAND VALUES OVER THE LONGER-TERM.”

FORESTRY MARKET UPDATE 2019

Source: Forestry Commission

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FIGURE 1 TIMBER PRICES RISING Index 100 = March 2012

Source: IPD UK Forestry Index

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FIGURE 2 RETURNS FROM FORESTRY % per year

SCOTLAND FOCUSScotland accounts for 45% of total woodland cover in the UK, according to data from the Forestry Commission, as well as the majority of transactional market activity.

As part of the new fully devolved arrangements for forestry in Scotland, the Scottish government has launched a long-term draft strategy for the “sustainable management of Scotland’s forest estate”.

The strategy gives greater prominence to the need to improve rural infrastructure, and commits to increasing investment in

FORESTRY MARKET UPDATE 2019

“ CURRENTLY THE UK IS THE SECOND BIGGEST NET IMPORTER OF TIMBER IN THE WORLD, AFTER CHINA.”

Important Notice. © Knight Frank LLP 2019

This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.

PRIME MARKET UPDATEPrime market price growth pauses in Scotland, but demand at the top of the market remains strong.

Rising uncertainty surrounding Brexit and its potential impact on the economy tempered growth in Scottish country house prices over the first three months of 2019.

Values were unchanged compared with December 2018, though on an annual basis they remain 2.3% higher. The prime market in Scotland has outperformed the rest of the UK, where prime values fell 1.8% over the 12 months to March.

Annual growth in Scotland was led by modest increases across the central belt, in the north and in the Borders, according to our Prime

Scotland index. More generally, rural locations within commuting distance of employment hubs have been the strongest performers.

Values have also been underpinned by a shortage of supply relative to demand, as well as the ripple effect of stronger performance in Scottish city markets. Our prime index for Edinburgh shows values have risen by 7.6% annually, making it one of the fastest growing cities in Europe by price.

The number of prime listings with a value above £500,000 outside of Scottish cities was 8% lower in the first three months of the year compared with the same period in 2018 and 23% lower than Q1 2017, an analysis of Rightmove data by Knight Frank shows.

Agents note that a lack of clarity politically has made some vendors more cautious about bringing properties to market, though well-presented homes that are priced to reflect market conditions continue to attract buyers.

Indeed, data from the Registers of Scotland covering the 12 months to January 2019, shows a 23% year-on-year increase in million pound-plus sales.

However, with Brexit leading the headlines and impacting on housing market sentiment, the prime market is driven primarily by needs-based purchasers who are moving for work, schooling or because they require more space.

The relative value on offer in prime Scottish markets compared to the rest of the UK should drive demand in 2019. Average prices remain around 20% off the pre-financial crisis peak in 2007.

KEY FACTS FOR Q1 2019

ANNUAL PRICE GROWTH FOR COUNTRY HOUSES IN SCOTLAND

COTTAGES HAVE BEEN THE BEST PERFORMING PROPERTY TYPE, WITH AVERAGE VALUES RISING BY 3.4% ANNUALLY

THE NUMBER OF PROPERTIES SOLD WITH A VALUE OF £1M AND ABOVE WAS UP 23% YEAR-ON-YEAR (12 MONTHS TO JAN 2019)

PRIME VALUES IN EDINBURGH ROSE BY 7.6% ANNUALLY

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FIGURE 1 FALLING PRIME STOCK VOLUMES New listings, £500,000 and above

Source: Knight Frank Research *excluding city markets

Oliver Knight, Residential Researcholiver.knight@knightfrank.com

SCOTTISH COUNTRY HOUSE INDEX Q1 2019 EDINBURGH CITY INDEX Q1 2019

Price growth moderated in Edinburgh in the first quarter of 2019 amid political uncertainty.

Average prime property prices in Edinburgh

rose by 0.6% in the first quarter of 2019,

taking annual growth to 7.6%. The city remains

the fastest growing prime market tracked by

Knight Frank in the UK as demand continues to

outstrip supply.

However, annual growth has moderated

from 10.6% since the end of 2018, which is

primarily due to a rise in political and economic

uncertainty as the UK’s planned departure

from the EU nears. A lack of clarity surrounding

Brexit has increased caution among some

buyers and sellers of residential property.

Most notable has been a slowing in activity

among more discretionary purchasers,

including landlords and second home buyers,

as they wait for more clarity as to what the

impact of Brexit will be on the economy.

That said, properties that are priced to reflect

current market conditions continue to

attract buyers.

In particular, demand for family houses outside

of the city centre has been robust, especially

in areas such as Murrayfield, Morningside and

Newington. As a result, the index shows that

on average, values for houses rose 9.2% in

the year to March, compared with growth of

5.1% for flats.

Values have also been underpinned by the

continued shortage of supply relative to

demand, which has been a feature of the

market in recent years. The number of listings

in Edinburgh was 5% lower in the first three

months of the year compared to the same

period in 2018 and the figure was 22% lower

than Q1 2017.

This decline is steeper for properties valued

at more than £500,000. There was a 22%

drop in new listings between £500,000 and

£1m and a 7.4% fall for homes valued at £1m

and above in the first quarter. As a result of

this decline, the ratio of new applicants to

new instructions for homes priced at more

than £1m rose to its highest level since 2015,

Knight Frank figures show, which should

continue to put a floor under pricing.

We expect this supply and demand imbalance

to underpin values in 2019, which should help

offset the impact of any political and economic

uncertainty to some extent.

KEY FACTS FOR Q1 2019

ANNUAL HOUSE PRICE GROWTH IN THE EDINBURGH CITY MARKET

RISING DEMAND FOR FAMILY HOMES HAS UNDERPINNED 9.2% ANNUAL PRICE GROWTH FOR HOUSES

7.4%

AN ONGOING SUPPLY AND DEMAND IMBALANCE IS EXPECTED TO UNDERPIN VALUES IN 2019

Oliver Knight, Residential Researcholiver.knight@knightfrank.com

FIGURE 1 PRICE CHANGE BY PROPERTY TYPE

Source: Knight Frank Research

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YEAR-ON-YEAR FALL IN NEW LISTINGS WITH A VALUE BETWEEN £500,000 AND £1M (JAN-MARCH 2019)

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The global perspective on prime property and investment

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Issues and insights Threats and opportunities for landowners

Rural property markets Our latest research and analysis

Working for you Adding value for our clients

Prime Scottish Index - Q1 2019

The Wealth Report 2019

Edinburgh City Index - Q1 2019

The Rural Report 2018

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FIGURE 3 LARGEST NET IMPORTERS OF FOREST PRODUCTS 2016

Source: FAO

timber transport projects across Scotland,

which will see over 200km of forest roads

built to improve access to timber.

A more detailed implementation, monitoring

and reporting framework is due to be

published within the next 12 months.

There are also efforts to increase demand

for home-grown timber – currently the UK

is the second biggest net importer of timber

in the world, after China – with plans to

increase the use of Scottish wood products

in construction. Such efforts are likely to

help support the market.

FOR MORE INFORMATION REGARDING INVESTING IN FORESTRY PLEASE CONTACT

Ross Murray

Chairman of Rural Asset Management+44 20 7861 1494ross.murray@knightfrank.com

Ran Morgan

Forestry, Farms and Estates, Scotland +44 131 222 9600 ran.morgan@knightfrank.com

Oliver Knight

Associate, Research+44 20 7861 5134oliver.knight@knightfrank.com

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FIGURE 4 TIMBER AVAILABILITY FORECASTS Thousand cubic metres overbark standing

Source: Forestry Commission