Returns from forestry hit new highs in 2005, thanks to rising timber prices.

Investors saw a 14.4% return on their money, according to the Investment Property Databank Forestry Index.

That marks a 5% rise on the year, making it the best result since the index began in 1992.

Timber prices rose nearly 14% in the 12 months to March 2006, adding to the 3.5% growth seen the previous year.

“The forestry market has been particularly buoyant over the past two years, with many investors appreciating that forestry returns are tax-free and that assets sit outside the inheritance tax net,” said Alastair Sandels, managing director of the Fountains Forestry Division.

“Steady timber market increases, new UK markets and worldwide commodity shortages should continue this trend,” he added.

The latest figures mean medium-term returns from forestry have outperformed UK bonds over three years (8% versus 5%) and UK equities over a five-year period (3.6% versus 2.2%).

However, since 1992, forestry has recorded growth of 2.2%, while bonds and equities achieved gains of 8.4% and 9.4%, respectively.

But Mr Sandels reckoned heat and power plants would offer firmer outlets for the small roundwood sector, often made up of thinnings.

Poor returns in previous years had pulled the whole market back.

“I think the prospect is one of steady returns,” he added.

“While there is no suggestion that forestry is an ideal investment for a pension, it offers a low risk, long-term investment that allows investors to take more risks elsewhere in their portfolio.”

Youngest forests (under 10 years old) recorded the best performance, at 27% a year over the three years to 2005, although they represented just 5% of the overall index value.

Older age bands averaged a more modest 7-8% a year growth.