Green Goldmine: Why Forestry Investment is Resilient and Profitable
It’s wonderful to watch your money grow – and that’s exactly what it does when you invest in forestry.
6 September 2023
From seedling to tree to timber, there’s something really satisfying about owning a tangible asset – one you can visit, touch and experience. There’s intrinsic value in trees and timber, and you can see that value literally grow over the years.
At Forest Enterprises, we offer investors the opportunity to buy shares in forests across the Wairarapa, Gisborne and Hawke’s Bay. Established in 1972 and still based in Masterton, we now manage over 20,000 hectares of investment forests for more than 6,500 investors, mainly Kiwis. Our clients can choose to put funds into a new forest at the beginning of its second rotation, into a forest nearer to harvest, or both.
Fighting climate change
Forestry is a sustainable investment choice because trees sequester (soak up and store) carbon from the atmosphere, helping to fight climate change and reduce CO2 emissions.
For example, the minimum investment in Bideford Forest, our current offer, equates to 1.3 hectares. This amount of forest will, on average, store 46.2 tonnes of CO2 equivalent each year – six times the typical emissions for a three-person Kiwi household.
Forest Enterprises has Forest Stewardship Council (FSC) Forest Management certification for most of our managed investment schemes. Ours are the only managed investment schemes in NZ to be FSC certified. We manage our forests in accordance with the FSC’s standards for responsible forest management.
This means we are independently audited to ensure we:
- Maintain, conserve and/or restore ecosystems within our forests
- Have a sustainable management plan that includes economic, environmental and social policies and objectives
- Maintain or improve high conservation values
- Manage our forests in a way that maintains their long-term benefits – economic, environment and social
- Take care of the social and economic wellbeing of our workers
- Uphold the rights of tangata whenua.
Forestry’s sustainability credentials set it apart from other asset classes, which is an important differentiating feature for many of our clients. Josh, for example, has had a career in international conservation. He began investing in shares, then diversified a small proportion of his portfolio into forestry.
“Because of my work, I’ve invested a lot of time in understanding carbon markets and sustainable land use,” he says. “For me, climate change is a big deal, so investing in forestry is about putting my money where my mouth is.”
Steady cashflow, income at harvest
Forestry investment provides returns in two ways:
- Some or all the forest will earn carbon credits, giving investors the option for annual cashflow once the trees reach a suitable size, typically after a few years
- When the trees are harvested, typically at 26 years, gains from the sale of logs are paid out to investors.
Because trees just keep growing steadily, paying no attention to what the markets are doing, they can provide reliable diversification for an investment portfolio. Research has shown investing in illiquid real estate, like timberland and farmland, has a low correlation or even a negative correlation to shares and bonds. This means that while the stock market is going up and down, and inflation is unpredictable, forestry investments keep ticking along, largely unaffected.
Additionally, payments for ecosystem services such as carbon credits provide another source of uncorrelated returns that have the potential to improve the diversification benefits of timberland investments as well as enhance returns.
Solid projected returns
We have paid out around $130 million in harvest income to our investors over the past six years. For our current Bideford Forest Investment, each 200-share parcel costs $10,078 plus affordable calls and has a projected return of $121,809 over 28 years, before tax and adjusted for annual inflation. (This is based on assumptions that can be seen in the product disclosure statement).
Many Forest Enterprises investors appreciate the regular returns as a source of retirement income, while others choose to put the income towards a long-term goal. Anna received a gift of cash when she was expecting her first child, and decided to look for an alternative investment that would come of age at the same time as her children.
“All of a sudden we had this future to invest in that wasn’t ours,” says Anna. “We had to decide what was important, and one of those decisions was education. We looked into a few investments. Forestry was best because we didn’t need an immediate return. It’s nice having something we can’t touch until harvest starts. By the time the kids are ready for school and tertiary study, we’ll be able to look at what we can offer them.”
Long-term alternative investment
Forestry isn’t a get-rich-quick scheme; it takes time for a tree to reach maturity. This means investors must take a longer-term approach to forestry funds. Forestry investment typically has low liquidity. However, Forest Enterprises offers a secondary market for those who need to exit their investment earlier than harvest.
Because it is classified as an alternative asset, forestry investments tend to make up a small proportion of an investment portfolio.
For example, engineer Mark is an investor who has around 5 per cent of his portfolio with Forest Enterprises. He spent plenty of time researching investment before he began building his portfolio in 2020. He invested in property, shares and small business investments, but he wanted to diversify further, so he turned to forestry investment.
“I wanted another investment that was separate to shares,” Mark says. “Forestry is completely different to any other investments I’ve got. My plan is to go twice; this rotation and into the next.”
Just like any other investment, forestry comes with risks – make sure you read our product disclosure statements to get a full understanding of the likely returns and potential risks. Speak to your financial adviser for guidance on whether forestry investment is right for you.
Forest Enterprises is the business name of Forest Enterprises Growth Ltd and its subsidiary Forest Enterprises Ltd. Forest Enterprises Ltd is licensed under the Financial Markets Conduct Act 2013 to manage Managed Investment Schemes (excluding managed funds) which are primarily invested in forestry assets. The offeror of shares in Bideford Forest Investment is Forest Enterprises Growth Ltd and the issuer of shares is the manager, Forest Enterprises Ltd. A product disclosure statement is available from our website forestenterprises.co.nz/bideford
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