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  • Choosing the right forestry investment

    2009 - 11.18

    Q) Are all forestry investments right for me?

    The simple answer may be no! Due to the nature of forestry investments and the variables that have to be considered before looking, it would be wise to size up the benefits in relation to your own personal goals before taking the plunge.

    The main questions to ask yourself are-

    · How long am I prepared to wait?

    · How much land would I have to buy to make it worthwhile?

    · Who do I need to contact?

    · On-shore or Off-shore?

    Q1) How long am I prepared to wait?

    A1) This will be dependant in some part on the area you wish to invest in. Plants and trees use photosynthesis for energy, this means that sugars are created from Co2 in a reaction with sunlight. Species growing in countries with less powerful sunlight and less daylight hours will grow slower than the same species in hotter areas with longer sunlight hours. This may not be a bad thing if you are to grow hardwood trees, as the highest prices are generally paid for slower growing trees with tighter annual growth rings.

    Trees also have a number of different ways that they turn Co2 into sugar. A tree that uses the C4 pathway will actually be more effective at converting sugars from Co2 than a tree that utilizes the C3 pathway only. This will therefore effect the growth efficiency of the tree.

    Even in Northern Europe, fast growing commodity species such as Sitka spruce and pine will take 30 years to reach a marketable size because there is little value attributed to young or even semi matured forestry… this factor will have to be a part of your planning for investing in forestry projects. Most trees in Ireland, Scotland, or Germany for instance will reach a marketable size in a longer period than commodity species in say Portugal or the USA. This could be a useful point to bear in mind.

    Q2) How much land would I have to buy to make it worthwhile?

    A2) This is a question you will have to consider and the answer can actually vary from country to country. To make the forestry investment worthwhile for harvest you will probably need 40 acres and above in the UK for a company to either purchase the land or for you to arrange a harvest with a timber broker.

    However in areas that have more abundant forest land the investment requirement may not be the same and you will probably need to purchase a larger area for it to be attractive for potential buyers. There are always exceptions to this rule, however this is something that would need to be researched on a like by like basis. Forestry properties that are flat, have good road and market access will always be more attractive for a potential buyer.

    Q3) Who do I need to contact?

    A3) There are two primary ways to get involved in forestry investments, the first being “managed forestry”, the second being “agroforestry”. There are many benefits to both types of forestry investment. In real terms, managed forestry investments will be specifically managed by a forestry professional. It will likely be a project which identifies commercially valuable species in mixed forestry stands and allows the more valuable species adequate room for growth whilst thinning out weaker , less valuable trees that may stifle the growth of the higher value trees. You will require a forestry consultant for this type of project.

    Agroforestry is more in line with agriculture (hence the term “Agro”forestry). Monoculture trees will be planted over a dedicated area. Agricultural or degraded land will be identified and forestry land will not be purchased for this type of exercise. Agroforestry plantations are primarily seen in places such as Portugal, New Zealand, Australia, Brazil, Morocco and Spain to name but a few. This type of farm forestry will require a professional agronomist and / or tree care expert with contacts, and a working background in agriculture.

    Q4) On-shore or Off-shore?

    A4) Returns vary around the globe and by species, each dominated by local supply, deficits, product values, and end user demand. Good multipurpose trees allow a number of alternative markets, whilst high value timber trees are dependant on size, straightness, strength, as well as demand. In Europe, forestry has been performing rather poorly compared to other global areas. Returns in the US have hovered around 16% over the past 30 years, whilst in Brazil returns have exceeded 20% annually recently. In Europe these returns have been historically lower achieving a rate of around 7%. There may also be problems investing in other countries such as market stability, possible corruption and other issues to contend with, so finding someone trustworthy to run your projects ought to be high on your agenda.

    After you have run through all the other questions you should be able to come up with a number of answers to help you consider the finer details of your forestry investment choice. If at this stage you are still unsure about investment levels, the thought of engineering your project and the investment lifetime, it would probably be advisable for you to look at either a low level forestry investment fund or growth plan that can enable you to exit at stages within the lifetime of the investment.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

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