Three ways to grow your money on trees

It may have escaped your notice, but in spring the UK faced a chronic shortage of fencing panels. Press reports told tales of panels being sold on the black market for £80 a piece, four times the usual price. The culprit? China. Timber shipments from countries such as Scandinavia were diverted to the Far East, where builders are willing to pay over the odds amid a construction boom. On top of this, China is now the world's leading exporter of furniture, plywood and flooring, and is consuming the world's forests to satisfy global demand for such products. That's putting pressure on timber prices across the world, and making forestry plantations an appealing investment.

In 2006, investment in forestry delivered returns of 20.6% against 14.4% in 2005, helped by the fact that institutional investors are looking for ways to diversify their portfolios. "There has been an enormous amount of interest in timber as an asset class. Timber funds are marketing themselves as not correlated to equities and bonds, which is, of course, of huge value to pension funds and hedge funds," says Edings Thibault, paper and forest products analyst at Morgan Stanley, in the Financial Times.

"Rising agricultural land values and rising timber prices have all contributed to the return and show no signs of abating in 2007," says Malcolm Frodsham of IPD Index. Softwood prices are up 15% for the first five months of 2007 already, as tender prices for large projects in central London continue to rise, says a report by cost management consultancy Davis Langdon. The City remains confident that price rises will continue. Theodora Zemek, manager of the New Star Managed Distribution fund, tells The Sunday Times that "wood is a low-risk investment, has little correlation with other assets and provides protection against inflation".

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Commercially managed woodland offers attractive tax benefits, including being free of inheritance tax after two years. You can invest directly, or via firms such as Forestry Investment Management, which pool money to buy woodland. But because of the large sums required (at least £15,000), it may be more feasible to look at Aim-listed funds such as Cambium Global Timberland Fund (TREE:Aim), which invests in forestry in America and Australia, and the Phaunos Timber Fund (PTF:Aim); or perhaps forestry management group Fountains (FNT:Aim).