Investing in Forestry

Compared with other investments, forestry is generally viewed as low risk. The tax-free status here adds significantly to its appeal. In this edition of Irish Timber & Forestry we examine the opportunities.

There are two obvious options for investing in forestry. One can simply purchase suitable land and manage the whole project from grant application to fencing, organising insurance, planting, thinning, etc. . . .  right through to final felling and timber sales. While this may be a worthwhile option for those with the necessary knowledge and time, it will be out of the question for the majority of potential investors.

The second option is to purchase shares in an investment plan.  With this type of investment, you simply read all of the small print, seek independent advice and if you're happy with what you've read and heard, sign the cheque. Apart from the relatively small amount of time needed, another plus is that one can invest as little as €750 for a single share. Several such plans or schemes have been marketed in this country. IFS Asset Managers, are I believe, by far the most successful in this field for *private investors. I should point out that IFS is not regulated by the Irish Financial Services Regulatory Authority as trees are a physical product rather than a financial product (I am including this point as a fact rather than being a disadvantage).

One of the disadvantages, however, is that in order to maximise the return you are tied-in for a given period, ranging from 10 to 30 years depending on the scheme. For example, there are options to invest in land at planting stage, where the investment period could be 30 years, and there are options to invest in partially grown forests, where the period to maturity and forest/timber sale is 10 years.

Writing on www.askaboutmoney.com/guide, Brendan Burgess says forestry is an attractive investment to many people. "There are generous grants available to plant trees commercially. The profits from forestry are tax free. The BIG disadvantage is that forestry is a very long term investment and the returns are just so uncertain."

From a North American perspective, Caroline Maxwell of www.investorsoffshore.com says there is evidence that the number of investors acquiring forestry solely for investment purposes has risen quite dramatically in recent years. She writes: "This form of investment usually provides competitive returns, low risks, and is an effective diversification from financial assets. Several studies have shown that timberland returns are not correlated, or are negatively correlated with returns of financial assets such as stocks and bonds, and that the inclusion of timberland in a portfolio of financial assets can therefore reduce the volatility of portfolio returns."

As with any other investment, there are risks. One risk is that no one can know what the market price for a cubic meter of timber will be at any given time in the future. Returns, which are currently estimated at between 8% and 14% per annum, are not guaranteed. Obviously the final value of your investment will be dictated by the market for timber when the mature forest is sold. Another risk is fire or storm damage; however, this can be reduced to an acceptable level with insurance, which may be included in the share cost price. Other risks include pests, such as rabbits, hares and deer, who invariably may want to eat the trees or the bark, but can all be controlled by following established management practices. As with any crop, the risk of disease will always be present, but Ireland has been relatively disease free and I don't believe this is seen as a serious concern.

Having mentioned the risks, there is plenty of room for optimism. The fact that trees are carbon sinks which may have a commercial value at some time in the future and the fact that trees are a renewable resource are becoming more and more important. These points coupled with the 'ethical investment' aspect of sustainably managed forests, are very likely to add to the overall value of the timber product. And of course, here in Ireland we're all aware of an emerging market for wood pellets and wood chips. All of these things can only increase the demand and therefore the monetary value of the forest/timber resource.