Teak has consistently delivered excellent returns for investors over the years – the period between 1975 and 2005 saw it increase in value by 8.5% for example. The prevailing view at the moment is that returns will be even higher as the global demand for teak increases. The International Tropical Timber Association estimate that that growth over the next few years will be in the region of 18 to 24% a year.
Investing in Teak
Teak investments are medium to long term investments that put investors’ money into tangible, sustainable assets – prime tropical hardwood that grows for 20 years or more in commercial teak plantations. Though Teak originally came from south east Asia, these days plantations are more commonly found in Africa and Central / South America and the plantations are now considered to be extremely attractive long term investments, both because of their ability to help in the fight against climate change and help local communities and also because they produce returns for investors that are consistently over 9% and higher and have been for decades. What’s more, the International Tropical Timber Association estimate that that growth over the next few years will be double that, meaning that there has never been a better time to invest in teak.
Teak Investment – An Opaque Market
For what is essentially a simple investment in an easy-to-understand natural and tangible product, the teak market can often come across as somewhat opaque and it is difficult to wade through the various providers out there offering investment opportunities. What’s more, if you try to compare the different providers you will find there is little useful data out there for a decent comparative analysis of the various teak investments. Hopefully this article will help shed some light on how to weigh up different teak investment options and highlight why we think Teak is providing one of the best and most reliable teak investments on the market.
Teak and ROI (Return on Investment)
The most common method you will see for assessing Teak investments is based on the Return on Investment (ROI.) ROI is considered to be a subjective estimate and one that is based on expected cash flows. However, cash coming in and out is not the only fundamental that potential investors should be considering, as the estimations you will be reading about Teak investments are based on a number of assumptions, including:
(1) An estimate of price inflation.
(2) An assumption of the base selling price of teakwood per m3.
(3) The commercial timber volume (m3) of trees.
(4) The schedule of thinning.
Teak price inflation is quite a tricky one to estimate for the future and consequently a lot of sites use historic data to justify their predictions. Supply and demand in previous years are not always indicators of a similar (or increased) supply and demand in the future.
Base Selling Price
This should always be linked carefully with a realistic achievable price from indicators in target markets.
Commercial Timber Volume
In order to assess the correct timber volume for any plantation it is necessary to investigate the diameter of the trees. Once you have established that the trees have a decent diameter (in m3) it is then also worth checking that the trees have plenty of space to grow and are growing straight up.
Schedule of Thinning
The schedule of thinning is another indication of commercial value. A thinning schedule sets the pace at which the plantation will be thinned out (removing bad trees) in order to leave more space for the good trees to thrive. Plantations only gain commercial value once they reach a particular age and when it comes to making valuations the earlier they set the thinning the schedule, the more positive an impact it will have on ROI because it indicates a shorter investment timeframe.
All of these factors are essential when it comes to working out the long-term viability and prospects of a teak investment, as opposed to concentrating solely on the Return on Investment. By examining each of these factors you can get to grips with the underlying assumptions (which are inherently subjective) that have been made in coming up with a ROI and better assess the risks involved.
Teak Investment – The Risks
Any investment has risks and it is worth pointing out those risks so you can make a proper assessment of any teak investment you are considering. The first risk to think about is whether a proper location and site analysis has been undertaken. This is especially relevant for new greenfield sites where the majority of the plantation is made up of newer, greener trees. Fires are a massive risk to teak plantations and older trees and plantations tend to have a far greater fire resistance than younger ones. Similarly, entering into a plantation investment at a later stage with more trees makes much more sense for investors as the maintenance needs are less and the projected results are far more reliable. In addition to these, other risks to think about include; paying too much at the point of acquisition, the assets being illiquid and lastly, an underfunding of the investment.
All of these risks can and should be mitigated by any decent teak investment. For example, because teak investments can be illiquid and are long term investments it is worth checking whether the company has invested in a number of different plantations each at a different stage of maturity. Doing so allows ongoing cash flows for investors rather than a single lump sum years later that is tied to a solitary harvest year.
Understanding Price Per Hectare When Investing
One useful marker when comparing plantations is to look at the price per hectare of trees. All teak plantations sell the same product – teak timber – and (should) have broadly the same cost structure. So, if you are looking for a way to compare plantations, price per hectare is one useful ratio for a quick comparison. Ideally the price per hectare on your investment should be lower than others on the market. However, there are sometimes certain factors that would justify a higher price per hectare, and it is worth keeping an eye out for these:
(1) Value additions (such as timber mills) that allow the plantation to control more parts of the supply chain and therefore add value to the investment.
(2) An experienced plantation manager (with a good record) can add value to a plantation as they reduce the risk of bad maintenance / fires etc.
(3) Certifications of sustainability from the FSC or the UN which allow the plantation to sell their timber to a broader market than plantations with non-certified timber.
In conclusion, you should not base your assessment of a teak investment solely on the numbers you see on their website and the estimations of growth they predict. Growing teak timber successfully isn’t as simple as it sounds, and when you are weighing up an investment you need to be considering everything from the timber volume to the thinning schedule and from the value additions to the plantation manager and sustainability of the venture.
Yes, teak has always performed well, returning 8 to 9% consistently and yes, many are predicting returns far higher than that in the coming years. But not every plantation will achieve that and not every plantation will be run successfully and managed correctly to achieve such returns. It is always worth bearing that in mind. However, here at GD forestry investments we think we offer one of the most sustainable, reliable and established teak investments on the market and are confident of forecasting such returns.