With a forest investment, an investor takes a financial stake in the investment object "forest". The income is mainly generated from the harvesting of timber and its subsequent sale.
Forest investments can be natural forests as well as plantations or wood-processing companies. At this point, I consider forest investments in the narrower sense. Investments in the wood-processing industry or in energy wood plantations are excluded.
Please also consider that most of the legal obligations mentioned here as well as deeper look into the species is rather a German/European perspective and could differ heavily in other countries.
Let us imagine the typical average stock of a private forest owner: One hectare of spruce forest ("Fichtenwald"), planted 40 years ago and left to its own devices since then. The trees are much too dense, thin, very long and, without being able to lean on their neighbours, would hardly be able to survive a mild summer wind without falling over. Even such plots of land are able to yield annual profits of several hundred € per hectare within a few years. Well-managed forests can easily yield returns of over 6%, and the way they are managed is more important than the quality of the soil or location of the plot.
Direct investment in forestry
The asset class wood can be invested in two ways. The "classic" way is the direct investment in forest areas. This type of investment is generally considered to be very stable in value (among other things because there are no daily updated prices, even though there are risks from e.g. pest or fungal infestation that can lead to total loss), but the minimum investment amounts are usually quite large and the investments are not easily liquidated.
In a direct investment, investors are directly involved in the forest land or trees as buyers or tenants. The forest is managed by a forestry service provider. They are paid from the proceeds of the sale of the trees. The investor is entitled to the profit after deduction of further costs. As a rule, the direct investment therefore comprises two contracts: a purchase or lease agreement for the land or trees and a contract with the forestry service provider.
Logical steps for direct investments include:
- record forest parcel
- Cartastral office ("Katasteramt")
- Different planting; when was it planted?
- Border display via surveyor
- record forest stand
- What was plantet? Completely covered with trees or are there larger gaps in the stand (e.g. diameter larger than 15m)
- Age determination (spruces ("Buchen"), douglas firs ("Douglasien") etc.)
- Soil quality
- use scenarios of the forest parcel
- Fuelwood supplier
- sustainability be optimally prepared for climate change, for example?
- Offer a home to as many species as possible?
Soil and tree species science
To identify a good correlation for your direct investment it is crucial to understand and deepen your knowledge in regards of your physical assets. Soil and tree species science is therefore something you should train your skills upon.
In general some criteria for better growth of all trees are: Availability of minerals and bases (acidification of the soil), water supply and aeration, i.e. pore volume.
So-called quick starters are:
- Light tree species such as birch ("Birke"), cherry ("Kirsche"), poplar ("Pappel") or rowan ("Vogelbeere) are quick starters.
- In the first 30 years they grow away from the other tree species, only to quickly decline in the following decades - as if they had spent themselves out of their depth. They are usually comparatively short-lived and make room for new shade tree species after only 100 years.
- + fast growth
- - hardly loses any needles and therefore offers a great attack surface in storms
- - threat of bark beetles ("Borkenkäfer") (if you are close to dying of thirst in summer)
- - prone to red rot ("Rotfäule")
- - spruce needles are acidic; humus under the spruces has a correspondingly low pH value
- - vibrations of the trunk in the wind are transmitted to the root plate
- + can get very old
- used for paper and furniture production and as construction timber
Douglas fir ("Douglasie")
- + high age, high tree height
- + can handle dry locations
- - not really suitable for lime as a base stone
- + natural protection against rot
- + relatively insensitive to insects and fungi
- + relatively storm-proof
- - Depending on the Douglas fir type, sparse needles and resinous stems can occur. Unfortunately, mixed seeds have been imported over the past hundred years, so most Douglas fir stands have a colourful genetic mix of the two origins.
- - When planted, young Douglas firs are particularly sensitive to drought. Even more than with other tree species, drying of the roots must be prevented; the months after planting are risky in terms of low rainfall and often mean a high rate of death.
- with 24% the second most common tree species in Germany's forests
- 40m final height, age over 500 years
- pine wood is used for chipboard, paper and beams for house building
- + stronger than spruce
- + undemanding of climate and soil
- + can also be planted in sandy, dry and cold areas
- - is regularly infested with caterpillar plagues that eat away the needles
- - use of pesticides necessary
- - a third less wood per year and hectare than the book and only half as much as the spruce
- - permanently low sales prices
- 40m final height, age over 500 years
- needle dropping tree
- + wind-exposed area without needles drops significantly
- + root system can penetrate deep into stony soils (further stability)
- +/- as a light tree species, the larch starts quickly with large height shoots, but declines significantly after only a few decades
Silver Fir ("Weißtanne")
- 50m final height, maximum age of 500 years
- + are attributed deciduous tree properties, since their needle litter is the basic material for a very good humus
- + shade tree species; tolerates it in its youth with very little light
- + up to 150 years the offspring waits without any significant uplift until an old tree dies, makes room and growth is stimulated by the stronger incidence of light
- - doesn't like heat and other climatic extremes
- + gets by with little water
- - more resistant to bark beetles
- maximum 120 years
- sloping or downy birch
- seeds spread with the wind
- + can serve as nurse trees, so to speak, by providing protection from sun and wind for sensitive shade trees such as beech
- + a team of two tree species (beech and birch) are economically interesting
- - do not produce significant timber yields until the age of 60 years, but a pre-grown birch can, if fasted in its youth, already offer the most valuable veneer wood
- + climatically very flexible (northern Sweden to southern Italy)
- use of high-quality trunk parts for furniture production or paper; interesting also for fireplace owners (because of the optics)
- 50m height, 400 years
- + extraordinary shadow tolerance
- - gradually pushes itself into the crown of the other species, causing them to die
- - young beeches need the shade of old trees for healthy growth for many decades
- + slowed growth in twilight ensures perfectly straight logs and best wood qualities
- the timber yield of a beech forest, measured in solid cubic meters, is about 25 % less than that of a spruce forest of the same size
- + beech wood has a 25% higher calorific value, the yields in the form of energy wood, measured in kilowatt hours, are identical to those of a spruce forest
- + grows in principle on all soils; the humus stores a lot of water and nutrients
- - on wet sites beech only forms shallow roots
- use e.g. for valuable furniture and floor coverings; most popular type of firewood
- up to 40m, rarely older than 500 years
- types: Sessile oak, English oak
- + superior on dry southern slopes or wet locations
- + typical light tree species; grows very quickly in the first decades before changing to a slower pace
- - slow growth at an advanced age causes an equally strong decline in wood production, so that oak forests can supply about one third less raw material than beech forests
- +/- as a semi-shade tree species the offspring grows under old trees, but can only compete with beech if it has a corresponding growth advantage
- Ashes love chalky or clayey, well aerated soils
- + the shed leaves of the ash are attractive to soil organisms and produce best humus
- - increased fungal infestation, only ash trees from robust parent trees should be planted
- end height 40m, maximum 500 years
- + the sycamore maple has exceptional frost tolerance and copes well at higher altitudes
- + prefers nutrient-rich, well aerated soils, also very humid
- in combination with beech, the maple, which grows rapidly in its youth, will sooner or later die if it is not helped
Bird cherry ("Vogelkirsche")
- - starts to rot from the age of 80
- - Wet and acid soils and areas with frequent late frosts do not suit the thermophilic species
- + already after 60 years, valuable veneer wood can be harvested, which regularly achieves top prices, provided that it is of appropriate quality
- Height max. 25 metres, maximum age 100 years
- + about 200 species depend on it
- + rapid growth
- + no special demands on soil and climate
+ already 60 years old, it can, just like the service tree related to it, achieve over 10.000,- € per solid cubic meter with corresponding qualities and is therefore considered one of the most profitable tree species at all
Risk & -reduction
- Every deviation, for example from the cheapest tree species, is paid for expensively by the forest owner in the form of time and money. For example, the cultivation of spruce in warm regions is prone to catastrophes and forces a constant new start through storm damage and bark beetle feeding ("Borkenkäferfraß").
- A forest owner with a colourful bouquet of species can always offer what is currently earning a lot of money. However, not all trees fit together. If light and shade tree species are planted at the same time in the same area, the end of light tree species is in sight after four decades at the latest.
- Trees are only felled when their timber is contractually secured, i.e. when the buyer and price are fixed. After all, the trunks are a perishable commodity: in summer, just a few weeks are enough to produce slow-moving goods due to insect or fungal infestation.
- With mixed forest it is like with financial investments: a wide spread reduces the risk. If your forest contains beech and spruce trees, for example, a total loss of spruce trees due to bark beetle damage or storms will not cause the end of the forest or the utilisation possibilities.
- In particular, any forest may be entered for recreational purposes. However, all visitors must behave in such a way that the forest is affected as little as possible and its management is not impeded.
- Depending on the federal state, this right of access may be restricted to certain paths or certain times of day. It is also usually forbidden to enter closed forest areas. As a rule, a permit from a forestry authority is required to close off forest areas. Therefore, it is also not permitted to deny other people access to the forest without good reason.
- This right of access also includes the gathering of small quantities of berries, herbs and mushrooms for one's own use outside nature reserves. However, anyone who collects natural products in large quantities in the forest without the express permission of the lower nature conservation authority, for example for commercial purposes, risks being fined.
Duty of care
- Within the framework of the obligation to maintain safety on the road, anyone responsible for a hazard must take all necessary and reasonable measures to prevent damage to others as far as possible. A forest can be a source of danger and you as the owner can in some cases be held responsible for any damage that may occur.
- The property tax for your forest is calculated by multiplying the taxable amount by the assessment rate of the respective municipality. The taxable amount in turn is calculated by multiplying the unit value by the property tax rate. A distinction is also made between property tax A for areas used for agriculture and forestry and property tax B for building land.
- The unit value depends on the type of use and is determined in a special determination procedure. The last main determination, however, took place in 1964. In the new federal states, the so-called substitute economic value is used, since the last main determination took place in 1935. The replacement economic value for forest land in the new federal states is €63.91 per hectare, while the unit value in the old federal states varies.
- The real estate tax rate also depends on the use of the area, as well as on the type of development and whether the property is located in the new or old federal states. A uniform 0.6% applies to forestry operations.
- The assessment rate is an instrument with which municipalities can influence the amount of municipal taxes due. In the case of property tax A, i.e. the property tax for land used for agriculture and forestry, the assessment rate is between 200% and 400% in most municipalities.
Suppose you are the owner of one hectare of forest in the new federal states, in a municipality with a rate of assessment for property tax A of 400%. If you multiply the replacement economic value of 63.91€ with the property tax rate of 0.6%, the taxable amount is 0.3835€. If you multiply this again with the assessment rate of 400% you get a property tax of 1,53€.
Professional association contributions ("Berufsgenossenschaftsbeiträge")
- Every forest owner is automatically a member of the Social Insurance for Agriculture, Forestry and Horticulture (Sozialversicherung für Landwirtschaft, Forsten und Gartenbau/SVLFG). The regular costs incurred here are company accident insurance. It is mandatory for all forestry operations in order to prevent forestry work from being carried out uninsured. Finally, serious accidents can occur during forestry work. Owners of areas of less than 0.25 hectares can apply to be exempted from this contribution.
- Contributions are calculated according to the "principle of retrospective coverage of needs". This means that the expenses of each year are included in the contribution calculation of the following year. The contribution is made up of a basic amount and a risk-oriented contribution. Both depend on the size of the area. While the basic contribution is between €60 and €350, the risk-based contribution for forestry operations has been around €20 per hectare and year in recent years. The resulting amount is then subsidised with federal funds.
- The contributions are calculated according to the "principle of retrospective coverage of needs". This means that the expenses of each year are included in the premium calculation of the following year. The contribution is made up of a basic amount and a risk-oriented contribution. Both depend on the size of the area. While the basic contribution is between €60 and €350, the risk-based contribution for forestry operations has been around €20 per hectare and year in recent years. The resulting amount is then subsidised with federal funds.
- For an owner of one hectare of forest, the annual contribution would be in the range of about € 60 to € 70, for ten hectares it would be about € 210. In terms of hectares, this contribution is significantly higher for smaller forest areas, because the minimum basic contribution of around €60 to €70 has only been reached in recent years for areas over 100 hectares, and all smaller areas will be raised to the minimum basic contribution.
- Roughly summarised: For small areas of one hectare the annual contribution is around €60, for areas up to 20 hectares it drops to around €20 per hectare per year. Due to the aforementioned principle of retrospective coverage of demand, the initial amounts can fluctuate from year to year and the federal subsidies are not fixed either. For this reason, the examples given here should only be taken as a rough guide.
Contributions for water and soil associations
- The tasks of the water and soil associations ("Wasser- und Bodenverbände") primarily include the maintenance of waters not navigable by ships, dikes, pumping stations and other water management facilities. The members of these associations are generally the beneficiaries of water maintenance, i.e. in particular farmers and owners of building land. In some Länder, however, municipalities are also members of water and soil associations, which in turn pass on the contribution claims to their land owners. This leads to costs for forest owners, although the forest actually serves to regulate the water balance and, for example, drainage measures and groundwater lowering potentially harm rather than benefit the performance of forests.
- Contributions fluctuate greatly and depend on the type of water bodies existing in the area of action of the respective association and whether dikes or pumping stations are needed in this area of action. Water and soil associations are naturally much more important along large rivers such as the Elbe, Oder or Danube, where complex polder systems are operated. In other wetlands and former mire landscapes, too, drainage via ditches and pumping stations can drive up the costs of water management. The contributions of water and soil associations can also be divided into a minimum or basic amount and an area-related contribution.
- Beware of blanket statements such as "spruce forest ("Fichtenwald") costs around 1.00 €/m²". The regional differences are huge in Germany! Forests near urban centres are generally more expensive than "in the middle of the pampas". Southern Germany has great forests, but generally abstruse high forest prices. If a piece of forest is actually for sale in Bavaria, 6.00- 8.00 €/m² are no longer a rarity. With the wood value such prices are not to be justified, because for e.g. spruce wood a forest owner does not get more in Bavaria than in Rhineland-Palatinate. In the new federal states the Treuhand has burdened the forest prices for decades with the areas that were once squandered at rock-bottom prices. Here one still gets veritable forest at "bargain prices". Areas at risk of windthrow with the wrong orientation cost less than wind-protected areas with the perfect orientation. etc.
- In principle, one should pay attention to the timber stock of a forest area. Then you can never be too far off. For example, if you set the land value at 0.30 €/m², although 0.25 €/m² would have been the correct value, you have set 20% too much, but if you look at one hectare (10,000 m²), that is just 500 €. But if you estimate the wood stock and assume that a spruce forest, for example, has 300 fm/ha of wood, although it is only 250 fm/ha, you have again missed 20%, but the value of the difference of 50 fm spruce trunk wood is currently around 2,500-3,000 €, minus all harvest losses and harvesting and return costs! Sometimes a few single trees make the difference. Oak is currently in great demand. If there are 10 thick oak trees (> 60 cm chest height diameter) on one hectare, which have a nice straight trunk, each of these trees can be worth 1.000 €. It is best to consult an experienced forest worker/forester.
- Address and date of birth of the seller (if there are several sellers, all addresses and dates of birth accordingly)
- Address and date of birth of the buyer
- Tax identification number (can be submitted later)
- Name of the boundary of the property
- Corridor number of the property
- Plot number
- Size in square meters
- Purchase price (total and price per square metre)
- are there any tenancies or leases yes/no?
- Purchase price payment: Is the purchase price paid in cash on the spot (possible & cheap but risky) or is the money carried out after the so-called due date notification of the notary (from the notary fees a little more expensive, because the notary "supervises" the payment process)?
Offers and investment forms
The market for forest investments in Germany is a niche segment of the grey capital market and is not subject to state financial supervision or similar regulations. In 2012, timber and forest investments in Germany reached a total volume of 19.8 million euros.
The total market volume of forest investments worldwide is estimated to be in the range of USD 300 to 467 billion, with an increase in investments in countries that have not been the focus of attention so far.
Forest investments have a long investment horizon due to the biological growth of trees. Even in the tropics, where trees grow faster than in the northern hemisphere, it takes about 20 years for a seedling to become a tree and be harvested. The security of the investment is therefore a high priority and politically stable countries are preferred for investment projects. Average terms of 15 years and a maximum of 25 years, as with the WoodStockInvest product from ForestFinance. Further examples of closed-end funds include the Pictet - Timber - I EUR. The Pictet-Timber Impact Report (2019) is also interesting in this context.
In some countries, the acquisition of property rights is also complicated, but these are essential for the long-term (and legal) security of the investment.
In addition to investments in the USA (e.g. in the form of the closed Jamestown Timber 2 Fund), Brazil and Romania, the German market offers forest areas in politically stable countries in South and Central America. Asia plays a lesser role, Africa is still mostly left out. Eastern European countries are popular because of the still low land prices, as are the densely forested Nordic countries. There are not many investment areas within Germany; compared with other regions, high costs are incurred here for the acquisition of the areas and for management.
An important criterion for closed-end funds is also whether the areas to be managed are fixed from the outset or whether they are a "blind pool", where they are only determined afterwards. In order to assess the opportunities and risks of an investment, it is of course advantageous if these are selected from the outset. A specific disadvantage of funds in general is the amount of the associated ancillary costs that are incurred by the investor right from the start. Costs are incurred in the development, distribution and administration of the fund. In addition, brokerage costs may be incurred for suitable properties (such as forest areas). In individual cases, the total proportion of ancillary costs for funds can exceed 20 percent. This means that out of 10,000 euros of invested capital, only 8,000 euros actually flow into forest acquisition and forest management and 2,000 euros are spent in advance on incidental costs.
Sale of wood
For forest investments, the relevant question is how timber prices will develop in the future
develop. Despite the increase in the world population, global consumption of
Industrial wood remained constant: In 1987 it was around 1.65 billion cubic meters and in 2012 it will be 1.66 billion cubic meters.27 Industrial wood consumption therefore does not seem to correlate with the development of the world population or the global economy. This may be due, for example, to the substitution of wood by other raw materials, increased recycling or changed consumer behaviour. In any case, it can be said that it is generally difficult to forecast timber price trends. If the price of a particular wood rises above a level tolerated by the market, customers switch to substitute wood or other materials. Plantation teak wood is mainly sold to Asia, especially India, and is consumed only to a small extent in the producing countries themselves. With teak, wood prices vary greatly depending on the dimension and quality of the wood, depending on whether it is, for example, five-year-old pole wood from a plantation thinning operation in Panama or 200-year-old teak from Burmese natural forests. Natural forest teak is considered one of the most valuable woods in the world and prices for high-quality natural forest teak can be quite
be fifty times what is paid for young plantation teakwood.
Wood defects and price indication
There are numerous factors that can influence the value of wood. Some indicators that could have an affect include:
- Knots in the wood
- Bending - trunk that is absolutely straight at least in the typical utilization lengths between 3.60 m and 5.1 m
- Twisted growth - Some trees have a twisted grain - in extreme cases the trunk reminds one of a wrung out towel. Boards made of such wood also twist during drying and thus become unusable
- Tension cracks - line on the bark along the trunk on several meters length, accompanied by resin leakage. Underneath this is a crack going down to the core, through which decay fungi penetrate
- Discoloration - Discoloration usually occurs in old trees due to oxygen ingress inside the trunk and leads to brown or reddish colour changes.
- Insect infestation - Insects create holes through their feeding activity, which can then be seen in the sawmill products. They therefore inevitably lead to devaluation and a reduction of the purchase price.
- Fungal infestation - There are different types of fungal infestation, those that only break down the sugar and thus do not destroy the wood, and those that decompose the wood itself.
Platforms worth mentioning for acquisition etc.
(Sorry, this time rather with a German focus)
More and more people want to invest their money according to ethical and ecological criteria and can choose from a variety of products. When it comes to evaluating a forest investment from an economic point of view. Forest investments are subject to great uncertainty and high risks. For people who want to invest their money safely and sustainably, it is therefore essential to obtain very detailed information in this area.
Website and the information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this website do not constitute investment advice.