Investing in Forestry - A Complete Guide to Forestry Investing
For investors seeking capital growth and tax-efficient income that is not dependent upon the dynamics of the wider financial markets, a well-planned and executed investment in forestry assets can generate superior financial returns driven primarily by the biological growth of trees into valuable, commercially viable timber and associated products. Forestry allows Investors and Financial Planners to diversify and optimise investment portfolios, whilst also reducing exposure to volatile money-market investments.
How do investments in forestry perform?
Forestry is a particularly appealing asset class for Investors seeking stable, consistent, long-term capital growth in a low risk environment. The majority of financial return derived from forest properties is driven by the biological growth of trees into valuable commercial wood products, whilst appreciation in timber prices driven by increasing demand for timber combined with fundamental limits to natural resource supplies, delivers compound growth with little volatility that bears little or no relation to the performance of financial assets and markets.
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Whilst the financial performance of forestry as a pure-play investment varies from region to region and through a range of timber species, common sense dictates that commercial forestry investment properties located in regions close enough to participate in the supply chain of emerging markets, where many economies are entering their most resource-intensive periods of population and socio-economic growth, and where the tropical climate is ideal for fast-growing tropical timber species, will remain best-positioned to generate superior return on investment.
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What are the risks associated with investment in forestry?
Investing in forestry has historically delivered superior returns and less risk than traditional assets - including the majority of stocks - over sustained periods of time (Sharpe Ratio). However the asset class is not without its own risk profile. The investment risk associated with any agricultural asset can be split into exogenous risk, i.e. sectoral or general economic risks, and endogenous risk, i.e. risks associated with the specific property, management or crop.
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Advantages of investing in forestry
For investors seeking a low-risk, alternative asset in which to invest - forestry offers a number of advantages over traditional assets such as stock, bonds and cash. Some of the main positive characteristics are:
- A hedge against the effects of inflation
- Superior long-term investment performance
- Stable, consistent long-term growth
- Non-correlated growth and income
- Tax advantages (in some regions)
Disadvantages of investing in forestry
Commercial forestry investments may not be suitable for all types of investor, and one must consider some of the negatives associated with the asset class. Some of the main disadvantages of forestry investing are:
- Forestry is a relatively illiquid asset class, sharing a similar liquidity profile to property
- Assets require expert on-site management in order to produce a commercial timber stand
- Forestry by its very nature in a long-term investment
- A number of endogenous risks exist and must be managed, including fire, flood, pests and disease
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