Investing In Teak
Why Invest in Forestry?
Forestry is seen as an excellent way to balance an investment portfolio. Institutional investors have been investing in timberland for over 100 years and the performance over this period has outperformed property, shares and commodities. The only asset class that has outperformed forestry is small cap equities. This out performance of small cap equities has though come at a cost of higher risk and volatility of returns.
The Sharpe ratio which measures the return on a portfolio compared to the risk of that portfolio shows that timber has outperformed most asset classes with a reduced level of risk.
Investing in forestry traditionally has been the preserve of institutional investors and the market has only been open to retail investors in the last few years. Traditionally some countries have shown a demand for forestry investments, such as Spain, but forestry investment to the UK Retail investor is a new proposition.
Until quite recently most timber investment was undertaken in the US, but due to the increase in demand for wood and wood products commercial forestry plantations have started in spring up in Central and South America, Africa & Asia.
As the world becomes environmentally aware and concern grows about the great level of deforestation occurring around the world due to illegal logging, there is a need to plant more trees. At one time over 40% of the earths surface was forest, now that is down to 13%
It has been estimated that 24 million trees are felled each year and this leads to a greater imbalance of carbon emissions against the earths ability to absorb it and create oxygen. With the emphasis on re planting rather than felling the supply of felled timber is decreasing whilst the demand for timber is increasing.
Reforestation
In many parts of Central & South America new commercial forest plantations are being planted. Land is being purchased that was cleared originally to allow cattle to graze and is now being replanted with new forests.
It is generally viewed that forestry is a long term investment that requires 20 to 25 years to reach full maturity. Due to genetic research the tree growing process can now be accelerated. If these genetically modified seeds can be planted in tropical conditions then the rate of growth can be significantly enhanced and tree growth in tropical climates can be 5 to 10 times that achieved in temperate parts of the US.
What this means to the investor is that the timeframe to maximize your forestry investments returns can be reduced from 25 years to about 16 years. This reduction in growing period significantly increases the return on investment and makes the timeframe acceptable for long term investors.
Teak the Best Timber Investment
Teak is the finest timber available and is always in demand for its manufacturing qualities. It is beautiful, water resistant and extremely durable. It is also one of the few woods that produces its own oil that prevents it from becoming brittle and cracking.
The wood is extremely resistant to pests & disease and other wood related problems and after a few years it is virtually indestructible. The wood produces its own oil which makes it almost impossible to burn so does not suffer the risk of being destroyed by fire.
Teak is also used in high quality furniture and its water resistant qualities make it ideal for decking, outdoor furniture, doors, window frames as well as yacht decks.
The Economics of Investing in Teak
With the increase in awareness of illegal logging and the move towards only buying felled timber from sustainable sources, the supply of legal timber has reduced. Coupled with this fact is that the demand for teak is growing. It is expected this will now continue for years to come as the worlds population grows towards 7 billion. This has the effect of causing teak prices to continue to rise. Historically teak prices have risen close to 10% a year. Over the last 10 years it has been a bit lower at 8.5%.
The investor also benefits from an additional compounding affect of nature. Biological growth rates on the size of the tree can grow between 3% & 6% per year. This can lead to annual returns to the investor over a 16 year period of around 15%.
If an investor was to buy an entry level investment in teak for about 3,500 euros this would still return a profit of 15,716 euros or a return of 449% over the 16 years. These figures also assume the price of teak will grow at 6% a year which is well below the historical levels achieved.
Summary
Institutional investors have been investing in this asset class for over 100 years. New plantations are now spring up in more tropical areas using generically modified seeds. The effect of this is to increase the speed of growth and the volume of wood grown.
With the demand for high quality wood growing whilst at the same time wood supply from illegal logging being reduced the demand for teak from sustainable plantations increasing, the investors can expect significant double digit growth over a number of years.
The recognition that teak is a great portfolio diversifier has lead to a number of SIPP providers to allow investment in this asset class within your Sipp. You should check with your Sipp provider before you take out the Sipp to ensure that it is flexible enough to allow you to invest in Teak, many traditional Sipp providers still limit you to Shares, Unit Trusts, Bonds and cash.
There are a number of new companies springing up with new forestry investments, but be careful and undertake your due diligence.
by: Mark Skeels
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