Forestry as an Investment
Apr 9, 2017
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I’m a walker and runner and New Zealand native bush is one of the best places you can go to do both and get some fresh air into your lungs. The smell of the bush is one of the best remedies for pretty much anything I reckon. And now that I live in what is effectively a desert environment I must admit to really missing a walk in native forest after the rain has stopped. I’m breathing deeply just thinking about it!
Click the play button to hear the morning chorus.
So, it took a lot of getting used to when I had to settle for going for a walk or a run through a symmetrically planted pine forest instead. Fewer birds, the scent of pine and you can see into the distance through the trees instead of not knowing what was around the next corner. And nothing much living on the ground except some struggling gorse bushes. And hayfever. At certain times of year the air is yellow with pollen. Achoo.
Over the years I have heard about forestry as an investment. I even toyed with the idea of our own Christmas Tree Farm as a side hustle. It is a REALLY long term investment as you wait for the trees to grow… But grow they will which then begs the question of whether it is worth the initial investment and the really really long wait. Investing has trends. It is all about index funds and passive investing now but back in the 90’s amongst other things forestry was a big deal.
I’ve been doing my research, so you don’t have to, and here is what I now know:
NZ provides only 2% of the world’s timber
Forestry is our third biggest exporter behind dairy and meat
New Zealand mostly exports to China, Korea, India, Japan, USA and Australia
The wood from pruned trees has a higher value and is called ‘clearwood’. Pulp grade wood has a lesser value. We are highly dependent on what the market wants and have to be able to adjust timber quality accordingly
We either export whole logs or process them in NZ before shipping off shore
And of course, we use a lot of wood right here in New Zealand.
The most planted tree in a production forest is Pinus Radiata aka New Zealand Pine aka Monterey Pine. It is native to Canada and USA but grows faster here because New Zealand is clearly a more awesome place.
They reach maturity in 28 - 32 years. If supply is low and demand high they can fell trees as young a 25 years
They are susceptible to some pests, getting blown over or burned down.
Another industry has sprung up in more recent times and that is referred to as the Carbon Market. I spoke with Matthew Barton, CEO of Greenplan which is a forestry investment company and he explained it as “an opportunity fraught with difficulty”. The idea was to encourage more tree planting but instead it has caused uncertainty in the market. The land owner is rewarded for the environmental service that the forest provides (sucking up carbon) and is given carbon credits for planting trees. They can then sell these carbon credits to the emitters of the greenhouse gases such as coal fired power plants who can effectively purchase the right to emit polluting gases into the air. For the investor they would receive approximately $40 per hectare (which can go towards their annual fees).
You used to only receive money for your trees when they were cut down and processed but the Emissions trading scheme allows the forestry owner to get an income as trees grow which can cover the cost of managing the forest. When I spoke with Matt he made the good point that you should focus on the trees as an investment, not gaining an income from carbon credits. Discussions around water purity, land use and carbon are indicating that landowners will now need to replant land once the trees are felled. The government appear to have managed to make a very simple concept, growing a tree, into a complicated industry where forestry owners are in limbo as they await reviews which will have implications on their business.
I’ve looked into Greenplan whose motto is “Wood is Good”. Catchy. I’m focussed on them because I know a couple who invested with Greenplan when they bought a $6,300 unit of “some sort of Pinus Radiata” back in 1996 when the trees were one year old. At the time it was “popular and considered a good investment”. The trees are still growing today and he has even swung past the lot to see that it actually exists... it does. They pay $80 per year for maintenance (pruning, pest control, fencing etc). They can get some tax back on this payment. They bought it and have pretty much forgotten about it until I started bugging them with questions.
As they are busy doing other things, I did a bit more looking into it on their behalf. They can keep forgetting about it for about another seven years which is when they should be ready for harvesting. Keep your fingers crossed for them. Other friends had a plot on the West Coast of New Zealand and it got demolished by winds a year or two back... Wind, Fire and Water (or lack of) are considerations to take into account when investing in forestry. You can insure your forest but may only get back what you invested and can kiss your future returns goodbye.
They will keep paying their yearly maintenance fees but they will not receive a penny in income until they either sell their plot or it gets harvested. What they actually bought was a unit in a partnership of a particular year known as “Barkers Number 18, 1995” - this identifies where the forest is and the year it was planted. They can check on the progress of their plot (including height and circumference) here: www.greenplan.co.nz
Screen shot from Greenplan Investor Centre of "Barkers Number 18, 1995"
They do not own the land the trees are on, that is either leased or owned by Greenplan who have about 7,000 hectares covered in trees in varying stages of growth.
Over 21 years they have spent $7,980 including their initial investment. Using information on their website I could see that a similar plot sold recently for around $12,400. If they sold today that would be a profit of $4,420, or $210 per each year invested. Yikes. That would not actually even buy a trailer of wood for their own fire each year… lucky they have a heat pump instead.
They got in at the start when the trees had just been planted and the point is to stick with it until the end. The bigger the tree gets the more it will be worth. Investors can sell their units if they no longer want them and it also means that instead of buying trees when they are first planted, they can be purchased throughout their growth cycle. The closer to felling they get, the higher the price of entry and it is supply and demand - there may or may not be units available where and when you are looking. Units for sale are advertised to existing investors first and then to you and I. The price is set by the vendor (with the guidance of Greenplan who I presume would stop the vendor just picking some crazy number). Prices tend to be non-negotiable and are paid in full to Greenplan at time of purchase who then pass it on to the seller. Greenplan charges a 3% commission and the Securities Registrar charges a $100 transfer fee. That is a big disincentive to sell early.
My friends have no intention of selling however and will be seeing their investment to the end. I was surprised to learn that Greenplan have not yet felled a single tree, they anticipate that happening in 2024. (I told you it was a long wait) When the trees are ready to harvest Greenplan source a market to sell to and then go about felling their forest. If the price is not right then they can hold off felling. Then they pay out the investor and that is the end of the investment.
My friends whose plot blew over also have another plantation up in the North Island. They have a private arrangement with a group of old acquaintances who collectively own the land and manage the forest. They have a statutory supervisor to ensure everything is legally hunky dory and they have a yearly meeting (with an excellent morning tea as any good shareholder meeting should have) to check on progress. When asked if they would do it again, she said no and followed it up by saying that they would have started it when they were younger as by the time the trees are harvested they will be well into their 70’s. They also had the added issue slapped on them that the regional council has deemed their land to be in a subsidence area so they MUST replant after harvesting. Their expectation is that the returns will have made it a profitable investment for them because they didn’t have ongoing fees etc.
Call me a tree hugger but I found this investment really interesting. I like looking into investments that are outside of the norm and this is one. Would I do it? It is not for me I am afraid and although I can see the massive market for New Zealand timber it has too many uncertain and volatile variables for my liking. Trees blow down, government and regional councils change the rules which introduce new costs, markets change their mind about what they want, returns for a managed forest appear low and I would need to know a lot more about the company whose job it is to manage the investment over 30 years. Plus, I’m 43 now and probably too impatient to wait until I’m 71 to get a payout. My friends have this investment as part of a wider portfolio and they know they will get a return at some point (unless the forest falls/burns down). I would like exposure to the forestry industry, just not directly but would instead do it via the latest investment trend, an index fund.
I hope this was helpful to you. Who knew you could write so much about trees! As always, let me know your thoughts.
