JUNO INVESTING ©

A growing investment

JUNO INVESTING ©
A growing investment

 

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SUMMER 2016

By Jacqueline Taylor

When it comes to investing for the long term, it doesn’t get much more prolonged than forestry. The most popular species of tree grown in New Zealand for the forestry industry is radiata pine. This variety reaches maturity relatively quickly, in 26–28 years. One hectare of radiata pine produces around 650–750 tonnes of timber. 

Unfortunately, 26 years is still a considerably long time, and investors need to consider that time frame when making an investment in forestry.  However, shares in a forest partnership are tradeable if an investor wants liquidity. 

A socially responsible investment

One of the attractions of forestry as an asset class is that it’s a socially responsible investment. Part of what we do in life should be to ensure that the planet is a sustainable place; and if, as an investor, you can gain a reasonable return from participating in this cause, then all the better.

According to The United Nations Food and Agricultural Organisation, the world loses approximately eight million hectares of forests a year – that’s 30 football fields per minute. With the world population growing by around 200,000 a day, it really is our duty (if you can afford it) to ensure that this natural resource is available for future generations. 

From an investment perspective, falling supply and increasing demand should make for a sound return over time. And another key characteristic of forestry is that it’s an investment in a real tangible asset that’s secured by land ownership.

Forestry generates a lot of interest from investors. Some of New Zealand’s wealthiest families own whole forests, and it’s always a sought-after asset from foreign buyers, particularly from Europe. The New Zealand Super Fund has around NZ$1.5 billion invested in the industry and it’s one of its best-performing asset classes. 

Returns expected from a forestry investment

According to farm and forestry investment company Roger Dickie New Zealand, the annual returns from forestry are currently around five to seven per cent, compounding each year. This represents a return over the full life of your forestry investment, with payment at harvest. 

New Zealand has the fastest-growing plantations in the world, the forestry industry is well developed, and we have good infrastructure such as deep-water ports. We are located close to the world’s fastest growing timber markets – China, India, and Asia – and demand from Asia for New Zealand logs is forecast to grow by 600 per cent by the time a forest planted today is harvested. 

New Zealand's Emissions Trading Scheme (ETS) means that investors can make additional early returns from carbon in their growing forest.

The risks of forestry investment

The most obvious risk to forestry investment is fire; wind is also a factor. But both of these events can be insured against. Disease and pest issues are non-insurable, but with a good forestry manager these are low risk.  

The price of logs and exchange rates also need to be considered. If the price of logs is at a cyclical low when the time comes to harvest, then that of course will lower the return you receive from your investment. Of course, if log prices increase, so too will returns.

A typical investment forest of 300 hectares will take three years to harvest, so it’s the average log price over that period that determines the ultimate return on investment.

Growing your own plantation

Unless you plan on making a career or business out of forestry, then it’s wise to invest with one of the well-known New Zealand forestry companies rather than go it alone. As well as Roger Dickie, Forest Enterprise is also worth investigating.

It’s possible to buy a share in an established forest. The level of investment depends on the size of forest, its age, location, and how much an original investor is willing to sell.  For example, Roger Dickie has investments available for NZ$16,000 for one hectare of 20-year-old trees.  Other partnership shares are available from NZ$50,000 to NZ$200,000 plus, depending on the size and age of the forest. 

And those with a particularly large investment portfolio can own a whole forest. The forestry company will then manage all aspects of the forest for you over the life of the investment.

Having a sustainable plan

Investing in forestry provides investors with portfolio diversification and plenty of feel-good factor. If you’re someone seeking to create an asset for your children and grandchildren, then forestry is worth considering, especially given present bank interest rates, which in some countries are near negative. Diversifying into New Zealand forestry as an intergenerational investment gives capital protection for the next generation.  

Forestry investment is a unique asset. It’s hard to find many investments that continue to ‘grow’ regardless of what the market is doing.

 

DEFINITIONS

LIQUIDITY: The ease with which an asset can be converted to cash.