Big trees are worth money
Wood investment: five ways to invest money in wood
Ralf Kretzschmar, January 8th, 2021
Wood investment providers advertise with attractive returns and calm the ecological conscience.
But investing in wood is not without risk.
So that you can still see the forest for the trees, you will find five paths here
investing in wood and also information on reputable providers of wood investments.
What is wood investment?
With a wood or forest investment, you either buy a forest parcel directly or become a leaseholder of one. Alternatively, you can participate indirectly in wood sales through funds, wood certificates or shares.
Since trees in Central Europe, such as spruces and pines, are felled only after about 80 years, they are not suitable for investing money. The respective plantations of the providers for direct investments and funds are therefore in Central and South America and Southeast Asia, for example in Paraguay or Vietnam. Due to the climatic conditions, the trees there reach a size that allows further processing in a shorter time.
Online platforms that offer wood investments have for example teak decided as a tree species. Teak trees are resistant to pests, are felled after around 20 years and the sale of the precious wood promises high profits.
Five ways to invest in wood
As mentioned earlier, there are several ways to invest in wood. You can either invest in forest areas directly via online platforms such as ForestFinance, or invest your money in wood indirectly via investments such as open and closed forest funds, wood certificates and stocks.
1 | Direct investment
With a direct investment, you are the buyer or the lessee directly involved in the piece of forest you have selected and invest a high investment amount. Usually you conclude two contracts: on the one hand the purchase or lease contract for the property and on the other hand a contract with the forest service provider who takes over the management of the forest.
If you are investing directly in wood, you actually need to be as old as a tree to get a return on investment. The full distribution is only made when the trees that have grown on your property have been felled and sold. Very long runtimes from 15 to 25 years are therefore the rule. With a first and second thinning after 8 to 10 or 12 to 15 years, you will only get a low yield beforehand. If the investment is successful, you can expect high returns of over 10%.
2 | Closed fund
Even if you invest in a tree property with a closed fund, you will only receive the majority of the return after the trees have been sold, that is after about 20 years. Since the money is also firmly invested in a closed fund, you have (as with a direct investment) during the term no access to your invested capital and so, in the worst-case scenario, cannot get your chestnuts out of the fire. Closed wood funds are therefore one illiquid investment. As with a direct investment, however, these drawbacks give you the chance of one high return of over 10%.
3 | Open fund
In contrast to closed wood funds and direct investments, with open funds you always have the option of to get out of your investment. Another advantage is that you don't have to wait years for a return, but benefit from price increases straight away. You usually invest in more projects with an open fund than with a closed fund and thus benefit from a broad diversification of risk. Due to this broad and mostly global risk diversification, a total loss is very unlikely.
The best-known timber fund is the Pictet Timber Fund launched by the Pictet Group in 2008. Viewed over the past three years, this has recorded a growth of 17.43%. (As of January 2021)
4 | Wood certificates
Wood certificates are mostly index certificates. These are made up of various shares in wood companies. The UBS Timber Index, for example, brings together the shares of the 15 largest timber companies in the world. In contrast to direct investments in trees, certificates are therefore subject to the usual market fluctuations. It is not uncommon for certificates to represent the entire forestry value chain and even beyond that if the companies are also active in other business areas.
As with open funds, you can use wood certificates get off anytime and do not only benefit after 20 years, but immediately from price increases. With certificates, however, you as an investor also bear a lot greater risk than, for example, with open funds, up to a total loss. In terms of returns, the UBS Timber Index (similar to the Pictet Timber Fund) has grown by 7.20% over the past three years. (As of January 2021)
5 | Wood stocks
Of course, you can also invest in individual stocks of companies in the wood sector. The largest timber companies are in the United States and Canada, such as Weyerhaeuser, International Paper and West Fraser Timber. In Europe, the largest timber companies are in Finland, such as Stora Enso and UPM-Kymmene Oyj. According to some historians, Stora Enso is even considered to be the oldest public company in the world due to a share certificate from 1288. Despite this long tradition, as with other commodity stocks, you should be careful. The market is risky, prone to fluctuations in value (volatile) and confusing - especially for beginners.
An overview of the forms of investment
What are the advantages and disadvantages of direct investments in wood?
Direct investment providers also advertise high returns of over 12%. They also promise a sustainable investment, as the plantations they have ordered would counteract the clearing of natural rainforests. Last but not least, the providers point to the increasing demand for wood around the world. In fact, the demand for wood in countries such as China and India can be expected to continue to rise. Direct investments in wood also have the advantage independent of crisis of developments in the stock market. They are also considered relative inflation protected.
However, this is a disadvantage with direct investments and closed funds very long running timeso that it will take decades to see whether your return will be realized. During this time you also have no access on your investment. In addition to these disadvantages, there are specific ones Forestry Risks In addition: Storms, fires, drought, floods and pests can destroy entire forests and thus your investment.
Other risk factors are Wood theft or political crises in the state of the tree plantation. So there is always that Risk of total loss. Also, don't underestimate that volatile timber price. For example, storms in other regions of the world, which bring large volumes of wood onto the market, can depress global prices. As a result, the promised returns will not be achieved.
Fraud and bankruptcies: dubious providers
Last but not least, many companies in the field of forest investment have a lot on the kerbholz. Cases of fraud and outrageous information for investors are more the rule than the exception. In 2018, Stiftung Warentest examined seven different forest direct investments in a test. Even the investments of reputable providers such as Forest Finance and Miller Forest were rated as consistently inadequate. Stiftung Warentest therefore advises against investing in wood.
The case study Green Planet AG
The company Green Planet AG promised its more than 750 investors to invest their money in the cultivation of teak and rubber trees in Costa Rica with returns of up to 13%. The investors entrusted Green Planet AG with a total of over € 15 million. After numerous criminal complaints from various customers and an investigation, the company filed for bankruptcy in 2014.
The regional court in Frankfurt am Main found that the board of directors of Green Planet planned in advance not to use the investors' money to grow trees, but to use them for purposes other than intended. The responsible entrepreneur was therefore sentenced in two cases to six years and ten months imprisonment for fraud.
A second example: Lignum Sachwert Edelholz AG
Another bankruptcy occurred in 2016. Lignum Sachwert Edelholz AG filed for bankruptcy. At this point in time, 5,000 investors had already invested more than € 65 million in Bulgarian wood plantations.
How do you recognize a reputable provider?
A reputable provider of wood investments will not make you unrealistic promises and instead will inform you comprehensively about possible risks. You should also pay particular attention to how serious the respective documents for your planned wood investment are.
What to look out for
- The Location of the plantation should not be prone to storms, forest fires and floods.
- It should be a resistant type of wood act so that at least the risk of pest infestation is reduced.
- The investment should be in a country with stable political conditions be made.
- The only reasonably credible guarantee that ecological minimum standards that is not undisputed FSC seal.
- Check if the costs and the composition of your return can be plausibly derived.
- Compare the fees different providers and ask how they are composed.
- Check the ones given by the provider Collateral, for example in the event of the insolvency of the company and its associated companies.
- Make sure that the land is owned by the provider. You can do this with the Land register entry review of society. If the land is owned, there is a certain amount of security for the company's assets.
- Is the Providers in the EU or in Germany, this offers you better protection in the event of a company bankruptcy or further legal disputes.
The best-known German-speaking companies for direct investments in wood
ForestFinance, founded in 1995, is the market leader for direct wood investments in German-speaking countries.
|ForestFinance||Miller Forest||Life Forestry|
|Investors||over 23,000||not specified||not specified|
|Investment volume||around € 90 million||not specified||not specified|
from 59 €
|from € 3,870||from € 4,100|
Status: January 2021
Conclusion: when and how much should you invest in wood?
Because of the high risk From direct wood investments it is advisable to spread the risk and not more than 10% investing all assets in wood. You should also find out all about your provider and the project you are aiming for. Due to the long terms Direct investments in wood of over 20 years are only suitable for long-term and not for short-term investments.
Real estate crowdinvesting is an alternative to investing in wood. Here, too, you are investing in a real asset, namely real estate. However, you can spread your risk significantly better with crowd investing than with direct wood investments.
BERGFÜRST is an online platform that specializes in crowdinvesting projects in the real estate sector. In contrast to direct investments in wood, investment opportunities brokered by BERGFÜRST offer you medium runtimes up to five years with fixed rate from 5.0% to 7.0% p.a.
Image copyright: Tadeas Skuhra / Shutterstock.com
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