21
COSTS
There could be further costs associated with
the investment above the initial purchase
price. These should be explicitly stated by
the investment provider, but there may
be hidden costs which are not clear at the
outset. Initial costs could include legal
and tax advisory fees, land registry fees,
administration fees and bank charges.
Ongoing costs could amount to 2-3% of the
capital value per year and include insurance
and general tree maintenance. Harvesting
fees could be as high as 30% of the timber
value and have a large impact on returns.
Investors should check what ongoing
management charges they are liable for and
whether they have to pay these even in the
years that no trees are harvested.
Note that investments that seemingly have
no additional costs may have bundled
them into the purchase price, or they may
have wrapped all the costs into one single
management charge. A breakdown of
costs can help investors assess if they are
overpaying in certain areas.
CURRENCY RISK
Currency risk will affect all investments
that are made in a foreign currency. Some
investments are sold in pounds sterling, but
the asset will be valued in the local currency.
It is priced in this way to make it easier for
the investor to understand and compare to
local prices – but investors should not let that
disguise the additional element of risk. Costs,
returns and the value of the timber will all
fluctuate with the exchange rate.
INVESTMENT PROVIDER
The investor should speak to all
counterparties involved with the investment,
as this is the only way they can be sure of
exactly who is responsible for what.
The track record of the investment provider is
extremely important. Have they had previous
investments that have run into trouble? What
is their experience of forestry? The investor
should also be completely clear on how the
product provider stands to benefit from the
investment. Are they selling the land and
then have no further involvement? Do they
receive a percentage of future timber sales?
Or are they also the management company?
It is important to identify exactly how the
investment provider is incentivised to ensure
that the investment is a success (over the
long-term).
PLANTATION MANAGEMENT COMPANY
The management company is in charge of
looking after the trees and the general day-
to-day maintenance of the land. They may
also be in charge of planting saplings and
closely monitoring their growth to ensure
that the plantation establishes itself during
the early years of planting.
Is the investor presented with the option
of more than one management company
when they invest? Can they appoint a
new management company should the
existing one not perform? What link does
the management company have to the
investment provider or land owner? Are
they incentivised to ensure the investment
is a success? Research the track record and
reputation of the management company.
They should ideally be local to the plantation
and have a number of years managing
forestry on a commercial scale experience.
ROLE OF AGENT
Distribution of the vast majority of forestry
investments is unregulated and relatively
unrestricted (of course forestry funds
and UCIS can only be distributed through
regulated channels to the correct category of
retail investor).
Unregulated sales agents work on behalf
of the investment provider and are usually
paid a commission based on the amount
invested. The investor must be sure that it is
in their best interest to invest and if they are
unsure they should seek independent advice.
Agents are NOT advisers, only an authorised
IFA can give you genuinely independent
financial advice.
CERTIFICATION
Certification by the FSC or the Rainforest
Alliance can provide a benchmark for
quality. To be certified the plantation will
need to meet certain criteria such as:
compliance with local laws, secure tenure,
community relations and workers’ rights,
environmental impact, management and
maintenance of surrounding areas.
EXIT STRATEGY
The exit strategy is generally reliant on the
sale of timber many years in the future.
There are a whole host of factors which
could affect the exit and result in varying
returns for the investor. Investors should
consider the effect on returns if they had
to exit early. For sapling investments
this is particularly important, as the
underlying land may hold little value.
Timber is a global market and it is very likely
that a buyer will be found, although the
price achieved for the sale of the timber
may vary considerably from the investment
providers initial predictions. Costs will
include transport and harvesting which could
dramatically lower the eventual return.
OTHER FACTORS
Is the success of the investment relying
upon improvements to local infrastructure,
roads being built, new timber processing
facilities or other things that are out of
the hands of the investment provider or
management company.
CONCLUSION
This may sound like a lot of effort, and it
is. But investing in forestry is no different
to investing in any other alternative
investment and in fact has some additional
risks as an unregulated and illiquid
investment. Investors will be committing
significant amounts of long-term capital,
so it is essential to leave no stone unturned
when investigating an opportunity.
However, good product providers should
be able to supply all of this material –
including the independent audits of the
land, independent valuation of the trees
and independent verification of the forecast
growth rates. If product providers are not
prepared (or unwilling) to supply these
documents than this is a warning sign that
the whole project is somewhat speculative –
especially for the newer projects.
“Costs can be high and wide ranging - ongoing costs could amount to 2-3% of the capital value per year
and would include insurance and general tree maintenance.”
