When it comes to investing, many people tend to focus on traditional asset classes such as stocks, bonds, and real estate. However, there is one type of investment that is often overlooked, even within alternatives and that is forestry.
It has been a struggle for me to not use ‘seeing the wood for the trees’ as a title but hopefully we can shed some light on this as an asset class.
Forestry investment can provide investors with a number of benefits, including the potential for long-term capital appreciation, a hedge against inflation, a source of steady income and tax breaks or climate rebates. In addition, forestry investments are relatively low-risk when compared to other types of investments such as stocks or real estate. In this article, we will explore the benefits and risks of investing in forestry, as well as how high net worth individuals can invest in this unique asset class.
Benefits of Forestry to High Net Worth Investors
High net worth individuals have a variety of investment options available to them, and forestry can provide a number of benefits that are not found in other asset classes. One of the main benefits of investing in forestry is the potential for long-term capital appreciation. Timber is a renewable resource that takes many years to grow, and as such, it can provide investors with the potential for long-term capital gains as the trees mature and are harvested for their timber.
Another benefit of investing in forestry is that it can serve as a hedge against inflation. Timber prices have historically been very stable when compared to other commodities such as oil or gold. In addition, timber tends to increase in value during periods of inflationary pressure since it is considered a “hard asset.” This makes timber an effective hedge against inflationary risk.
Investing in forestry can also provide a source of steady income for high net worth individuals. Many forestry companies pay regular dividends to their investors from the profits generated by their operations. This can provide investors with a source of steady income.
Finally, forestry investments tend to be much less risky when compared to other types of investments such as stocks or real estate. This is due to the fact that forests are not subject to the same type of market fluctuations that can impact other asset classes, in part due to their long duration.
Risks/Problems with Forestry Investment
As with any investment, there are risks and problems associated with investing in forestry. One of the main risks is the long-term nature of the investment. It can take decades for trees to grow, which means that investors need to have a long-term outlook in order to see the potential returns. This can make it difficult for some investors to stay committed to their investment.
Another risk is the fact that forestry investments are closely tied to the performance of the global economy. A recession or economic downturn can lead to a decrease in demand for timber and forest products, which can negatively impact the value of the investment.
A problem that can arise in forestry investments is the fact that it can be difficult to accurately estimate the value of the timber on a property. This is because the value of the timber can be affected by a number of factors, including the species of trees, the age of the trees, and the condition of the forest. As such, it can be difficult for investors to accurately assess the potential return on their investment.
How to Invest in Forestry
There are several ways for high net worth individuals to invest in forestry. One option is to invest directly in land by purchasing a forested property. This can be done by purchasing an existing property or by participating in a tree plantation development. This option allows investors to have control over the management of the property and the potential profits from the sale of the timber. This also avoids inheritance tax.
Another option is to invest in forestry funds. These are private equity or venture capital funds that invest in companies involved in the forestry industry. These companies can be involved in activities such as tree planting, forest management, or timber harvesting. Most forestry funds are structured as limited partnerships and they involve a degree of risk. As such, they are only available to qualifying investors who meet certain net worth requirements. This option provides investors with the opportunity to gain exposure to the forestry industry without the need to purchase and manage a property themselves.
In addition, there are also publicly traded companies that are involved in the forestry industry, such as timber REITs (Real Estate Investment Trusts) that can be bought and sold on a stock exchange, these companies own and manage forests, and generate revenue through the sale of timber and other forest products. These types of investments can provide a more liquid way to invest in the forestry industry and can be more easily bought and sold than direct investments in land or private forestry funds.
Investing in forestry can be an attractive option for high net worth individuals who are looking for diversification outside of traditional asset classes such as stocks and bonds. When done correctly, it can provide investors with the potential for long-term capital appreciation, a hedge against inflationary risk, and a source of steady income. However, it’s important to have a long-term outlook, consider the type of investment, and research the various options available before making any decisions. Direct investments in land or private forestry funds may be more profitable but they are also more time-consuming and require more management. Investing in publicly traded companies or forestry funds may be more liquid but also less profitable. Ultimately, the choice will depend on an investor’s personal preferences and financial goals.
AssetTribe is working with a number of forestry assets producing short duration closed end structures to provide yield or capital appreciation. Find out more at www.invest.assettribe.io