5 Things to consider when investing in forestry
Posted on: 16 March 2011 by Gerald Fitzsimmons
This article focuses on five aspects to consider when making an investment in forestry and addresses some of the pitfalls you should try to avoid.
Forestry investment is an opportunity to participate in an environmentally responsible venture which has the potential to yield respectable returns on your money while helping to preserve the planet at the same time. However, when making such aninvestment it's important to understand the factors which will ensure the venture you're embarking upon will enable a realisation of your economic and environmental goals.
1.Where should you invest?
Forestry investments can vary in size and geography and are available in all parts of the world. When making your decision, one must consider key facts about the location of the investment to ensure it's economically sound and politically viable. The financial stability of the country should play an important role in any decision you make.
By understanding the fiscal climate you can assess whether a long-term investment has the potential to yield positive results. Currency should also be considered and countries with historically weaker tender may impact you when trying to maximise your return. Other external factors such as political stability and availability of labour are also considerations, and should be weighed up before making your decision.
2. What are you paying for?
Forestry can offer three elements to the investment; however this may vary depending on the type of agreement, plantation and timber on offer. Firstly, you have an opportunity to invest in the actual timber which tends to be the bulk of the investment. The timber will be felled after a predefined time frame and sold off to generate income.
A return can also be made from the wood chips which are formed from the upper portion of the tree and sold as biomass. Finally, there is potential to generate income from the land itself.
As some forestry investments allow you to purchase the title deed to the plot, there is a potential to make substantial return after the term of the investment expires. Bear in mind however this element of the return can only be make if you decide to sell the land, as some investors may wish to continue to grow and invest for more than one harvest cycle.
3. What are the risks?
Like any investment product, you need to weigh up both sides of the deal to ensure the investment will meet your financial objectives. Forestry, like any other financial venture, comes with its own set of risks. These can mostly be categorised into one of two groups: environmental or financial. The former refers to things such as damage from wildlife, fire and storm destruction which could impact the development of the plot. there are of course insurance products which can be purchased to offset these risks and they are certainly worth investigating, especially considering forestry will be a long-term investment. On the other hand, financial risk refers to not achieving the returns when it comes to felling your plot. This can occur if the lot is not managed properly or regularly maintained. There tends to be an inverse relationship between the amount of time spent managing your plot and financial risk i.e. the greater care given to the management, the less you are inclined to financial risk exposure. The trade-off should be considered in all events.
4. What returns are predicted?
Any investment should aim to deliver a healthy return when it comes to fruition. It also helps if you have a firm grasp of the product, understand how it will yield a return and are able to track its progress through the investment life cycle. The good thing aboutforestry as an investment product is that it's tangible, whereas similar products, such as stocks and shares, are not.
Monitoring progress helps to ensure a positive end result but you should always check to see what returns have been predicated. Use historical evidence to check how the investment has previously performed; however remember that past performance is ot a guarantee for future success. Each forestry investment must be taken on its own merits while demerits should be at a manageable level.
5. How long do you have to wait?
Forestry should, on the whole, be considered as a long-term investment. Depending on the type of venture, different plans will offer differing investment terms.
A traditional timber project such as investment in Teak will normally mature after around 20-25 years. However, there are certain products in the market which yield a result much sooner. Robinia, for instance, can be felled after just 10 years and has wide-scale industry application. Ultimately it all depends on your personal level of commitment but checking to see when you're likely to see a return is vital as it will help you plan for the longer-term.