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are variable and depend on the price of
timber at the time of harvest and the size
and quality of the trees. Estimated returns
range from a modest 7% to as high as 40%
per year.
Many projects only pay returns at the end
of the investment term, with forecasted
total returns between 150%-600%. It is
extremely hard to accurately predict what
timber prices may be in 20 years’ time
and therefore investors should not rely
on these predicted returns for any type
of wealth planning. However, the investor
is able to delay tree harvesting until
favourable price conditions occur, which
could give them some flexibility when it
comes to exiting the investment.
EXIT
Forestry investments are generally
structured with the exit at the end of
the lease term. At this point all of the
remaining trees are harvested and the
timber sold. As forestry investments are
designed to perform over a specific period,
and returns from the final harvest are
the most lucrative, most customers are
expected to hold onto their investment for
the full term.
Early exit is possible through selling forestry
holdings as an appreciating asset and
transferring ownership of the agreement to
a new customer. Some product providers
have a marketing service to assist in finding
a customer on the secondary market, but
in most cases it is the responsibility of
the investor to find a secondary buyer. In
reality there is not an established secondary
market for these investments and they
should be considered long-term and illiquid.
ETHICAL INVESTMENTS
Forestry investments also have an ethical
dimension, with product providers
emphasising their commitment to
sustainable reforestation, biodiversity and
supporting local communities.
Many projects will also claim that they
contribute to the improvement of the
socio-economic conditions in the local
communities where they operate.
This includes creating employment
opportunities, building houses for
workers and their families and prioritising
local businesses as suppliers. Some
product providers also set up charitable
organisations to support local schools
and community programmes. It is unclear
though whether these initiatives are always
fully supported.
Verifying the truth of these claims and
the extent of the projects commitment to
the environment or local communities is
difficult. One way that forestry plantations
try to demonstrate their commitment
to sustainable reforestation is through
gaining certification by the Forest
Stewardship Council (FSC). The FSC is an
international, not-for-profit organisation
which promotes responsible stewardship
of the world’s forests. FSC accredited
forest owners are held to international
standards of environmentally appropriate,
socially beneficial and economically viable
forestry management.
Some projects also claim to benefit from
carbon credits through the Voluntary
Carbon Standard (VCS), which establishes
criteria for validating, measuring and
monitoring carbon offset projects. The
market for carbon credits is largely
undeveloped and relatively high risk and
many projects may claim to qualify for VCS
before they have been through the rather
rigorous verification process.
TYPES OF FORESTRY
Based upon research into the direct and
non-regulated forestry investment sector
this has identified three main categories of
forestry investment. The sector is split down
by wood type with hardwood, softwood
and grass offering investors a choice of
forestry investments with different risks
and returns. Investors can also choose from
standing wood or sapling investments.
HARDWOOD
Hardwood trees generally have a high
density but are not always a hard material,
for example balsa wood is one of the lightest,
least dense woods there is and is considered
a hardwood. Hardwood timber is used
in a large range of applications including
construction, furniture, flooring and utensils.
Trees supplying hardwood are naturally
found throughout the world from the
Boreal and Taiga forests of the North to
the tropics in the South. Plantations for
investment into hardwood have also been
established in a variety of locations, most
commonly South America but also Asia,
Africa and Europe. There are many types of
hardwood tree including Ash, Beech, Birch,
Oak, Balsa, Hackberry, Teak and Mahogany,
but the tree types available for investment
are Teak, Paulownia, Robinia, Eucalyptus
and Melina. Teak is the most commonly
offered hardwood timber investment in the
market today, with products available from
a number of providers.
Hardwood trees are generally slow
growing, but their timber is also typically
more expensive. This translates into
higher minimum investments and longer
investment terms of 20-24 years. Investors
also have to wait a long time before
they receive their first returns, as first
harvests usually occur 10 years or later
into the investment. Due to their higher
market prices however, projected returns
of hardwood investments are very high
with providers forecasting total returns
of around 150% to as much as 2,000+% in
some cases.
SOFTWOOD
Softwood trees are generally less dense
than hardwood. Softwood timbers are
used for many of the same applications
as hardwood, including construction and
furniture, but being less expensive to
produce they are generally used at the
cheaper end of the market.
Softwood trees are the source of around
80% of the world's timber production,
with traditional centres of production
being the Baltic region, North America
and China. Plantations for investment into
softwood trees have been established
in South America, Asia and Fiji. Species
of softwood trees include Acacia, Balsa,
Cedar, Pine and Spruce but investment
opportunities only exist for Acacia and
Sitka Spruce.
There are fewer softwood opportunities
in the market than hardwood, but faster
growth rates offer investors shorter terms
“Forestry can often have an ethical dimension, with product providers emphasising their commitment
to sustainable reforestation, biodiversity and supporting local communities.”
