20
DUEDILIGENCECONSIDERATIONS
How does the investor own
the asset?
Location
Exit
Strategy
When did the investment
launch?
Is the investment SIPP
acceptable?
Are the returns fixed or
variable?
How much land has been
planted with/contains trees?
Is the investment regulated?
What is the underlying
asset?
How much land is under
management?
Who is the forestry
management company?
What are the returns on
offer?
Is there a track record of
returns/buy-backs/capital
growth?
There are a wide range of risks associated with forestry. Risk may vary between direct investments, collective investment schemes or
investments with a corporate structure, but the underlying fundamentals for success will stay relatively similar. As with any type of
alternative investment, the risks become greater when the investment is based in a far-off location, offering speculative returns and little
protection to the investor. The research and due diligence process will be broadly similar for most unregulated forestry investments.
WHAT DOES THE INVESTOR OWN?
The investor must know exactly what they
are purchasing and how they will own the
investment. Are they buying leasehold
or freehold land? Or ownership rights of
the trees planted on the land? Are they
investing through a fund or corporate
vehicle? The land may be located in a country
with complicated ownership and foreign
investment laws, and therefore the investor
needs to verify that they are allowed to own
the land, and exactly how they own the land.
Investors should have this checked by an
independent lawyer.
LAND AUDIT
Seek independent verification from a third
party agricultural auditing company, such as
SGS. They will be able to assess the land on
behalf of the investor to verify that the land
is being sold at a fair value and that trees
are planted and in good health. They may
also be able to provide growth forecasts for
the trees and provide a guide as to what the
future sale price of the timber may be.
RETURNS
Forestry is an illiquid investment and
investors need to ensure that the returns
on offer are high enough to reward the
risks being undertaken. One advantage of
forestry is that once trees reach a certain
age they can be harvested at any point.
This could be to take advantage of high
timber prices or to release some money
from the investment, or conversely the
trees could be left in the ground until
timber processing is more favourable
The investor should seek third party
verification on projected tree growth rates
and timber prices in the land audit.
LEGAL ADVICE
It is essential for all information to be
verified by a third party, preferably a
lawyer. They will undertake their own due
diligence and look into the land title and
ownership of the trees. The lawyer should
also look into any ownership restrictions or
foreign investment restrictions that could
impact the investment.
It would also be advisable for the lawyer
to review any agreements for the ongoing
management of the trees. This will help
to define the role of the management
company and any costs that they will pay
on behalf of the investor, and also help
the investor understand what rights they
have should the management company not
perform as expected.
RESEARCHANDDUE DILIGENCE
TAX ADVICE
Tax advice is essential to understand the tax
implications of the purchase. The tax advisor
should have knowledge of the relevant tax
laws for the country where the investment
is based in order to ensure that all taxes are
correctly paid and settled when due. This
reduces the likelihood of a very large tax bill
in the future. They will also be able to advise
on what taxes may be due when the investor
comes to exit the investment, such as capital
gains tax.
INSURANCE
Insurance is essential when owning any
physical asset and particularly important
for forestry. Tree growth and quality
can be affected by a number of factors
such as disease, floods, drought, fire
and hurricanes. It is important to have
comprehensive insurance in place to cover
any of these eventualities. It’s also worth
enquiring what measures are in place to
mitigate these risks, such as fire-breaks or
flood defences.
The insurance cover required may vary
depending on how mature the trees are
i.e. sapling investments or well established
standing wood. There have been instances
whereby plantations have been decimated
without appropriate insurance being in place.
