Forest – to be precise its wood – has always served people in different ways. Used as fuel, product and building material, it became clear as early as the 18th century that forests had to be managed sustainably in order to not fully exploit resources. Wood became a valuable commodity and has remained so to this day. In Germany for example it is mainly the state, the nobles and the church that benefit from it. Find out how smaller investors can also achieve sustainable profits with forestry investments.
Monotonous monocultures, as pictured here with spruce, may be lucrative investments. However, they are a disaster for the environment. Photo: Pixabay
A few years ago there were only few types of forestry investments, Now there are many different types available, such as forest shares, forest funds or direct forestry investments. Upon closer inspection, most of them offer investments in wood (production). ForestFinance is one of the few providers that builds and protects forests and develops investment products from them.
The wide range of investments is due to its success: The NCREIF Timberland Index, which results from the prices of millions of hectares of U.S. investment company forest, has been rising steadily for more than 20 years. The fluctuations in value are minimal compared to stock indices and forestry and timber investments are becoming increasingly popular as asset value investments and inflation protection.
This is what a sustainable forestry investment looks like: this video shows ForestFinance forests that can only grow in this near-natural if investors not only keep an eye on returns but also on the environment.
A forestry share is a security which securitises a share in a stock corporation whose capital is invested to a large extent in forest property or wood processing. The value of forestry shares results from the stock market valuation multiplied by the number of shares. If the forestry share is listed on the stock exchange, trading is relatively easy.
There are no German forestry stock corporations with significant free float on the stock exchange. In this country, primarily Scandinavian and North American forestry stock corporations are traded. For German-speaking investors, it is difficult to obtain information on these corporations. Another disadvantage of forestry shares being tradable on the stock exchange at any time is their extreme fluctuations in value. The valuation of most listed forestry shares has fluctuated by several hundred per cent in recent years. This is mostly due to the strong dependence of many forestry shares on economic trends. Most forestry share companies are predominantly wood processors, who are strongly affected by economic fluctuations and thus by fluctuations in pulp or timber prices.
Direct forestry investments in precious woods, on the other hand, can react better to market fluctuations by postponing the harvest. The trees are left in the forest until the harvest is worth it – they become bigger, taller and more valuable every day. In addition, the fluctuations in precious wood prices are significantly lower than those of timber or wood used for pulp production. Besides, the yields generated from a direct forestry investment are generally tax-exempt while the price gains of forestry shares and forestry shares dividends are subject to the almost 30 per cent flat rate withholding tax including solidarity surcharge and church tax.
Direct forestry investments also offer advantages from an environmental point of view: the afforestation of new trees can only be initiated as an investor. Buying forestry shares, on the other hand, does not necessarily mean planting new trees.
ForestFinance has been proving for almost 25 years that ecological forest projects successfully generate yields. Read more on this topic here.
The most common investments in forests are direct investments or closed-end funds. Whereas in direct investments investors invest directly in one or more trees on specific areas and leave the management to a service provider, closed-end forestry funds are less individual. Investors in forestry funds are merely investors in a company that acquires and reforests land in order to produce wood. As shareholders, investors benefit from timber sales proceeds and correspondingly more if timber prices rise on the market. Thus, forestry funds as well as direct forestry investments and forestry shares are classic commodity investments. Since funds are usually solely aimed at profit for the investment company and its investors, forestry funds are largely investments in monocultures that are supposed to produce timber quickly and cheaply.
An aerial shot of our mixed forests in Las Lajas, Panama.
At least in Germany, it is not that easey. “It is very difficult to buy forest in Germany”, says Michael Freiherr von der Tann, president of the Hessian forest owners association in an interview with ntv, a German TV news channel. For him it is clear: forest should not be sold and bought but inherited undividedly. The demand for forests has therefore been growing for years without sufficient forests being offered for sale. Forest owners attribute rising demand and prices to interest rates and monetary policy of the European Central Bank. Prince Michael of Salm-Salm told the newspaper “Tagesspiegel”: “The saver is punished, the debtor is rewarded. A side effect of this madness is that material assets become more expensive, including land and forests.” According to ntv, forest prices have doubled over the past 20 years, further spurring on the desire to buy domestic forest and reap profits. This desire, however, is not easy to fulfil: In addition to the purchase price, land transfer tax, notary and fees, which often make up ten per cent of the purchase price, are added, thus significantly reducing the returns for forest investors. Moreover, property tax has to be paid annually and wood production in Germany is relatively expensive due to environmental regulations and certifications.
Forest areas in other countries offer far higher returns, although buying forest in foreign countries can be difficult for foreigners. It is much easier to hire companies to lease or buy forests or fallow land in other countries, to manage them in order to generate yields for investors.
The benefits of forestry investments are the growing demand for the raw material wood. There are fewer and fewer forest areas and already today the demand for wood exceeds the supply. This suggests that timber prices will continue to rise in the future and ultimately all investors will benefit from this. If the afforestations are also managed sustainably – or are even designed, as with ForestFinance, to become permanent, near-natural forests – an investment in forests can literally generate green returns.
But there are also downsides. Forestry investments are not always socially beneficial, especially when stock corporations and other big companies buy cheap land in foreign countries and perhaps even displace locals, or the price of land for local residents rises immeasurably as a result of land purchases. Also, not all forests that are created through investments are ecologically friendly. Thousands of hectares with cloned eucalyptus or teak planted in rows are no gain for nature. On the contrary: many insecticides and pesticides that pollute and destroy the soil and the environment have to be used.
All forestry investments have one risk factor: the long contract term. Even with sustainable forestry investments which respect human rights and the environment, the planted trees need lots of time to grow. On ecologically farmed land, they probably take even longer to grow than the fast-growing trees in monocultures, which are harvested earlier, to produce cheap pulp and biomass. This is to the advantage of the slowly growing trees – because trees become larger with every centimetre, they gain in volume and thus in value – but it cannot be ruled out that during long contract terms, much can happen: companies can fall victim to mismanagement or go bankrupt, the regions in which the forests grow can become politically unstable. Natural events such as fire, earthquakes, droughts or floods also have a lot of time to occur over the years. Forestry investment are therefore right for investors in particular if they do not shy away from risks, have the necessary financial means and staying power until the trees generate returns.
An important indicator for a reliable provider is its presence on the market. The longer he has successfully reforested and managed forests and perhaps already paid out proceeds to investors, the more likely it is that he will continue to do so in the future. It is also important how transparently a forestry investment provider operates: does he publish consolidated annual reports, disclose calculations showing how timber yields are generated and is there an opportunity to visit the forest areas and speak to employees on site? Based on these important indicators you can recognise solid and reliable business partners.
A forestry investment should be well considered. Here you can see an overview by ForestFinance of the risks and safety measures of our forestry investments, which ForestFinance explains in detail on two pages in all product brochures.
ForestFinance is one of the leading providers of direct forestry investments within Europe. We make investments in reforestation for the environment, climate and species protection possible. For example with our TreeSavingsPlan: you decide how much fallow land in Panama will be turned into a forest for you by us. An investment in your own forest starts at 38 euros per month.
With every tree that we plant for you, you create precious habitats for plants and animals. Moreover, your investment allows people to earn their livelihoods under fair conditions in a region where jobs are rare. Our forests are guaranteed to be managed sustainably and are all certified. In addition, TreeSavers create biodiverse forests which are to remain permanently, instead of monotonous monocultures.
We care for your mixed forest that is planted for your investment in Panama and selectively harvest the fine timber without clear-cutting after 25 years. Thus, you help create sustainable forests and receive the proceeds from the timber sales.