As investors put more money into forestry, experts at Gresham House, one of the largest global forestry managers, share their insights on the role of timber in the net zero economy and its increasing appeal as an investment asset.

New research from UK-headquartered specialist asset manager Gresham House forecasts that a widening supply and demand gap in coniferous sawn wood consumption – the main source of structural and construction timber – will create a global shift that has important investment, climate and construction implications. 

Elise Macdonald, investment associate, forestry at Gresham House, highlighted that climate change has introduced new dynamics to the timber market, presenting both opportunities and challenges.

The firm estimates that demand will increase by 50 to 80 per cent by 2050 compared with 2022 levels, depending on the extent of global warming and the policy responses implemented. Although this level of growth is high, the asset manager considers it realistic, given that demand has already grown by 40 per cent over the past 25 years in a global environment that was less focused on decarbonisation.

The surge is being driven by urbanisation, the transition to a low carbon economy and housing shortages.

Macdonald said that a growing, wealthier population increases the need for homes and public infrastructure, which in turn increases the demand for construction materials. Higher GDP can also lead to larger and higher-quality housebuilding. 

The Gresham House report reflects continued interest in forestry as an asset class. The profile of perceived steady returns, as well as the connection with environmental concerns about carbon capture and habitat protection, have been positive forces. See related articles about regenerative forestry, and how family offices are involved.

As countries and companies commit to net zero, timber is also emerging as a low-carbon alternative to concrete and steel. It stores carbon, requires less energy to process, and enables faster, cleaner construction. Gresham House recognises that the chronic shortage of new housing will continue to drive demand for timber globally. 

By contrast, the firm estimates that supply will only increase by 10 per cent relative to 2022, with potential downside from forest disturbances, despite governments commitment to forestry. The UK government has committed to increase tree canopy and woodland cover in England from 14.5 per cent 16.5 per cent of the total land area by 2050. But Macdonald said timber rotation takes 30 to 100 years, and much of the accessible supply is already under pressure. The limitations of supply-side data create additional uncertainty, and the expected supply-demand gap could put upward pressure on timber prices, enhancing the value of forestry assets.

Macdonald highlighted the need for more government action and public-private sector intervention. Opportunities lie in technological innovations in timber products, supportive policies promoting sustainability, and revenue generation through emerging carbon and biodiversity markets. But in view of budget constraints, she is unsure how much UK government support will increase.

Meanwhile, Anthony Crosbie Dawson, director, forestry and private clients at Gresham House, highlighted the tax benefits of investing in forestry, since it is exempt from capital gains tax, and is a good inflation hedge. The correlation with inflation is very important. Crosbie Dawson said the firm’s forestry funds have delivered annual returns of 11 per cent since inception. He also believes that as ESG pressures grow, investors' appetite for forestry assets will continue to climb, compressing yields and driving valuations.

Crosbie Dawson said that Gresham House had closed its largest ever forestry fund in May, raising $500 million for Forest Fund VI. The capital will be used for planting and managing new and existing forests across the UK. The fund targets returns of around 8 per cent annually. “Britain currently imports about 80 per cent of its timber and wood fibre, with the main source of imports coming from Scandinavia,” he said. Forest Fund VI aims to localise supply, supporting rural growth and timber needs for domestic construction and manufacturing, sustainably. It is expected to sequester 4.7 million tonnes of CO2 over the next 25 years. Where appropriate, investors in the fund will receive distributions in the form of carbon credits, which may be sold to provide an additional return or retained for carbon insetting.

The firm believes that the future supply-demand dynamics are likely to enhance timber’s capacity to generate stable cash flows and provide returns that demonstrate low correlation with other asset classes. This makes timber a valuable tool for portfolio diversification in a changing investment landscape.

Gresham House has been managing commercial forestry assets on behalf of institutions, endowments, family offices and private investors for over 40 years. It currently manages £3.4 billion in forestry assets across the UK, Europe and Australasia, making it one of the largest global forestry asset managers by value and the largest in the UK. See more about the firm here, here and here.