Financial News

Money may not grow on trees but investors who placed funds in British forests last year have seen returns far outstrip those from any of the traditional asset classes.

New figures show the Investment Property Databank UK forestry index returned 32 per cent in 2007, five times higher than equities and bonds and in sharp contrast to the fall in commercial property.

Forestry benefited from rapidly rising timber prices and a jump in demand. Timber prices have retreated in recent months and advisers do not expect such stellar returns this year, though they say there is plenty of room for further growth.

"There are clear signals now that the world is heading for a shortage of sustainably produced timber," said James Hepburne Scott, representative of the Confederation of Forest Industries. "Investment has outperformed almost all the other sectors."

Wood is increasingly being used industrially in place of fossil fuels as a more sustainable energy source. And while the credit crunch has caused a slowdown in construction, developers are under pressure to use more timber in an effort to go green.

Alastair Sandels, director of forestry at Fountains (LSE: FNT.L - news) , one of the sponsors of the forestry index, said demand remained very strong. "There may be a slowdown in the increase in returns this year but we are not seeing a reversal."

Even if the rate of forestry return growth slows as expected, the asset class is likely to remain in better health than other sectors.

Forestry is driven by different fundamentals to other asset classes - it is more sustainable, renewable and is less linked to the financial markets - so can help to reduce volatility in investors' portfolios.

The IPD said investors were keen to take advantage of rising global commodity prices, particularly sustainable raw materials. They had also been attracted by tax breaks.