How to Assess the Best Forestry Investment
January 28th, 2010 |
Forestry investment has outperformed most other assets for the last 30 years, providing consistent returns averaging 15% per annum over the last decade. Institutional investors like Jeremy Grantham have been using forestry as an effective inflation hedge for years (Grantham even holds 20% of his personal investment portfolio in Forestry), and an investment of �1 million into a managed forest in 1990 would be worth on average �16,366,537 today in 2010 (tax free in most countries too!).
So what is the best forestry investment, and how can smaller investors, who maybe don�t have access to �1 million, participate in forestry investment and take advantage of the low risk, high returns that have been enjoyed by institutional investors for decades?
There are many structures available for smaller investors, with options from Teak to Argawood, through to Paulownia and even bamboo, and there are also various locations to choose from covering most continents and all economies from frontier markets to developed economies. Choosing which type of forestry investment is for you will depend on how long you want to tie up your cash (tree type), and your attitude to political risk (where your forest is located).
After conducting some extensive due diligence on the harvest times of different timber types and their historical price performance and forward looking demand, and also settled on where you are, and are not, happy to invest, you can start to narrow down your selection of investment projects.
Deal Structure for Smaller Investors
Smaller investors can participate in forestry by buying or leasing a small part, maybe a hectare or three, of a much larger managed forest of maybe 1000 hectares. The investor will own the rights to the trees on their hectare of land, and those trees will be professionally managed, harvested and the timber sold, along with all the timber from the entire 1000 hectare site. This kind of deal structure allows retail investors the same kind of deal participation in forestry as institutional investors. These types of investment structures also suppress the ongoing costs involved with forestry in general, as the cost of professional management of your trees, harvesting, negotiating sales and transporting timber is shared amongst all investors in the site, and economies of scale apply.
There are also forestry investment structures that go a long way to mitigate risk, with land title held in trust in the UK or U.S. to protect smaller investors from company failure, and there are even forestry investment packages where all the timber is sold in advance, giving investors a pretty accurate picture of the forward revenue they will receive from their forestry investment.
So, In my opinion, the best forestry investment would encompass a deal structure that mitigated the risks of forestry investment by choosing a forest growing a timber in high demand, and a quick grower too if possible, so I could see a financial return inside five years; Paulownia fits this description quite well. There are no known diseases affecting Paulownia, and the tree doesn’t catch fire below 400 degrees, effectively removing the two greatest risks involved in forestry investment. Paulownia also grows quickly, and under the right circumstances can be harvested every five years, giving investors four cash yields over twenty years.
In my search for the best forestry investment, location figures quite highly as previously mentioned and from a climate perspective I would be looking at South America, Brazil, Panama, Costa Rica all have the relevant climates, and Panama has a favourable tax regime too so revenue earned from the sale of timber, if handled correctly, should present a tax efficient profit for a forestry investment in panama.
The best forestry investment then, as far as timescale and risk are concerned would for me, be Paulownia trees in Panama, with a deal structure in place to ensure a minimum risk level for the investor.
David Garner is Managing Partner at DGC Investment Consultants - http://www.dgc-ai.com - a boutique alternative investment firm advising a network of investors on alternative assets including agricultural investment, investing in forestry and property investment.
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