Forestry Investments – How to Maximise Returns and Minimise Risk

In the current global climate, defined by low interest rates; high inflation; volatile investment markets; and poor short term visibility, investors are seeking out alternative investments that generate growth and income that does not depend on traditional market performance.As such, much attention has been focussed on timber investments as a tool to preserve capital, hedge inflation and generate superior income in a low-risk environment.Institutional Investors such as pension funds, university endowments and hedge funds have long known the benefits of investing in timber assets, with many such as the Yale University Endowment Fund holding 28 per cent of their investment portfolio in real-asset alternative investments including tropical forestry investments and farmland.Timber investments are seen as generating non-correlative investment returns due to the fact that the majority of revenues is sourced from the biological growth of the tree, with only a small percentage of return attributed to timber price growth or land value appreciation. One credible university study found that over 60 per cent of returns from forestry investments can be attributed to the ‘biological hedge’.Demand for timber products remains strong, and rises roughly in line with population expansion, a factor compounded by economic expansion in developing nations leading to a n increase in consumption of timber products per capita as new homes and other infrastructure in developed.Currently, around 30 per cent of global timber supplies are sourced from illegal logging, and a further 40 per cent form unsustainable sources. The future demand dynamics then indicates that timber investments are likely to continue to outperform other assets such as equities, as they have for the past 30 years.Taking a very broad view, forestry investment returns can be enhanced and potential downside risk substantially reduced through the application of strategic species and location selection, combined with experienced forestry management to create a sustainable and profitable investment model.Broadly speaking, the faster a tree grows into commercially viable timber, the greater the return on investment, so selecting fast-growing tropical timber species is the first step in consolidating profitable forestry investments. Bamboo is one example of a timber species with great potential as a subject of sustainable forestry investments due to the fact that the rate of biological growth is so rapid as to ensure a commercially viable, harvestable timber stand within 4 years of planting.Other features to take into account to maximise forestry investment returns are sustainable plantations managements, suitable site selection and investing in upstream products developments, allowing timber growers to process their raw materials and sell value-added timber products such as boards and other processed wood products.Investors interesting in harnessing the characteristics of forestry investments for their own portfolio should be encouraged to seek advice from an independent third party with experience in identifying and delivering successful forestry investment projects.

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