Forestry as an asset class and destination for expansion capital is increasingly on the minds of investors, according to a recent report by Indufor, the forestry investment consulting company, and other players in the sector.
While the asset class is nothing new – many investors have had an allocation for years – it is being offered to a wider range of investors, according to the report, and Toomas Kams, manager of HD FestForest’s Estonia operations, a Baltics-based forest investment manager, has noticed a change in the type of investor too.
“The first clients, 15-16 years ago, were quite opportunistic. Now they are more professional and more institutional; pension funds are an example,” he said.
Part of the reason for the increased appetite is the impact of the global financial crisis on investor risk appetite, added Kams, although the global location of the investment can provide a very different investment prospect in terms of risk and return, Kams and others agreed.
The Nordic region, a much more mature forestry market, is still offering attractive investment opportunities and will soon be home to Finland’s largest-ever investment in the sector, a bioproduct mill that is being built by Metsä Group of Finland. And Kams argues that “the Baltics are seen as a safe investment area, because their currencies are strong and they have strong links with the EU”.
But emerging markets also offer many attractive investment opportunities, according to Tapani Pahkasalo, head of forest investment services consulting at Indufor.
“There is increasing interest towards forestry investments, both in the mature markets (with low risks involved) and in the emerging markets, even on the frontier markets such as Africa. Yields on the mature markets have declined and investors are increasingly searching for higher yielding investment targets,” he said.
And some emerging markets can provide very appealing geographies in terms of climate but also costs, argued Andrew Collins, chief executive of Miro Forestry Company, a sustainable forestry business operating in West Africa.
“We chose Ghana and Sierra Leone for three reasons,” he said. “Firstly, trees grow very fast in that part of West Africa – the climate is comparable to some of the best regions in the world, such as Brazil, in that respect. This means a shorter cash cycle time, less total cash requirement and a quicker return for investors.”
“Secondly, demand for wood is very significant in the West African region due to booming GDP growth and dwindling supply of timber locally, a result of 80% plus levels of deforestation over the last 50-100 years. Thirdly, operational costs in West Africa remain competitive on a global basis.”
Sustainability and responsible investing have also increasingly crept into the minds of the investors in question, according to Collins and Christopher Winters, marketing director at Global Forestry Capital, a sustainable forestry plantations company.