Our Expertise Unlocks The World

Safe Haven Investing With Timber

Investing With Timber

Marketing Director Harry and I are out the door to the airport to catch a flight to Nicaragua. I’ll be in touch from the road. Meantime, I turn you over this morning to global real estate investing guru (and my husband) Lief Simon:

“With the ongoing volatility of the markets, alternative hard-asset investments seem increasingly sensible options.

“For example: timber.

“History has shown that an investment in timber gives better returns with less risk and volatility than any other type of investment. Timber can average yields between 12% and 15% a year over the long term.

“You’ve got several options for how to invest in timber. You could, for example, buy the stock of a lumber company. But you run the risk of the stock falling.

“You could buy trees from a tree farm. I know one company in Costa Rica that operates this way. You tell them the types of trees you want, they plant the trees and manage them while they grow, then they help market them when they mature.

“Your returns can be excellent, but, in the end, you are subsidizing the land ownership for the tree farm. Once your trees are harvested, you’re done. You have no residual asset.

“Your best option, therefore, is option #3: Invest not only in the trees, but also in the land they’re growing on.

“Panama is a great place to grow trees and one of the handful of places in the world where you can grow premium teak trees. A friend here, Robert Kroesen, owns a teak reforestation company, called United Nature, with more than 3,000 hectares (7,500 acres) of timber plantations, primarily teak. Investors can buy small or large tracts of land already planted with teak trees. Robert’s company then manages the trees throughout their growth, including regular thinnings and other maintenance to help the trees mature in a way that maximizes their future value.

“One package Robert offers through United Nature is parcels that qualify for Panama’s reforestation visa program. To obtain this type of foreign residency visa, you invest the amount mandated by the government in a certified reforestation investment program (United Nature’s plantations are certified). The reforestation investment visa amounts to the least expensive and most efficient option for obtaining foreign residency in this country.

“However, in August, the Panama government changed the rules for all foreign residency visas, including the reforestation visa. Specifically, in this case, they increased the required minimum investment. Before Aug. 26, you could have obtained a reforestation visa with an investment of as little as $40,000. Post Aug. 26, the minimum investment is now $60,000.

“But it’s not the reforestation visa that is the opportunity today. It’s the timber investment itself.

“There was a big rush in the weeks leading up to the Aug. 26 deadline. Many seeking Panama residency wanted to act before the new rules took effect. Robert and his team at United Nature worked to pull together $40,000 investment packages in record time to keep up with the demand.

“At the 11th hour, two would-be visa-package investors changed their minds, leaving Robert with two investment parcels of planted teak, each in its own corporation, and ready to sell, but no longer valid for the reforestation visa program, because they don’t meet the new minimum investment rules.

“These packages may be no longer valid for the reforestation visa program, but, as straight investment opportunities…they’re very interesting.

“Robert shared the details of these two packages with me last week, explaining that he was mulling over what to do with them. He could invest the time and money in taking them out of their individual corporations and re-incorporating them as part of United Nature’s general plantation, he said…but I made another suggestion:

“‘Offer them for sale as investment packages.’

“Robert not only liked the idea, he even proposed offering the two packages at a discount.

“Teak is an amazing tree. It grows very tall very fast and then starts to fatten up. During its first three years of growth, the tree is susceptible to fire and pests. Once it enters its fourth year, however, it is virtually impervious. In fact, Robert’s own plantation is a living testament to teak’s ability to withstand a forest fire.

“A few years ago, a fire started on a neighboring farm and spread to United Nature’s land. The teak trees in the fire’s path lost their lower leaves, but, otherwise, suffered no damage. Not one tree died.

“The vegetation on the neighbor’s land didn’t fare so well. Nearly everything he’d planted was wiped out.

“Because teak is strong enough to survive almost anything after three years in the ground, Robert sells only parcels with trees three years old or older. This gives the investor some security that his timber investment won’t be wiped out by some catastrophic event.

“However, the two parcels that have come back to Robert were planted in 2002. These trees are six-years-old. This is important. Not only are these trees well past the point during which they’re vulnerable to risk, but these trees have started to fatten up.

“In fact, if these trees were part of a larger investor parcel, Robert wouldn’t be offering to sell them at a discount. He’d be selling them at a premium. To state the obvious, six-year-old trees are more valuable. They’re bigger…and closer to their harvest time. In this case, three years closer than the trees Robert typically sells as part of the visa packages.

“Still, to keep things in perspective, teak trees aren’t harvested until they’re 20 to 25 years old. A teak plantation is thinned regularly as the trees mature. These thinnings produce some income, but the real payoff is at the end.

“If Robert were trying to help an investor resell a similar package of 2002 vintage trees (which he sometimes does, for example), he would increase the price of the plantation 10% a year for each year of growth beyond year three. That would value these packages at more than $50,000.

“These packages, remember, were originally valued at $40,000 (that was the minimum requirement to qualify for the visa reforestation program).

“When the trees reach full maturity, the projected returns, based on a $40,000 investment, would be in the range of 10% a year…assuming that teak prices don’t go up over the next two decades. That isn’t likely. With some prices appreciation in the market value for teak wood, that 10% could easily turn into 12%, 14%, or more a year. I don’t know what else you could invest in that would position you for double-digit annualized returns for 20 years.

“And you don’t have to wait 20 years to see some of your return. You could always sell your teak plantation before final harvest, as there are other investors out there who would rather invest in an older plantation closer to maturity than in a newly planted one. In other words, this is a commodity with a market, a reasonably liquid investment, and, as I mentioned, Robert helps his owners with resale later on.

“With each of these $40,000 packages on the table, you get approximately 1.3 hectares originally planted with 1,200 trees. The land is titled and held by a single-purpose Panama corporation. The corporation already holds the reforestation certification. This is no longer important for the reforestation visa but it does provide another benefit. The eventual profits from sales of your timber are tax-free in Panama…as long as the property is certified.

“You’d be buying the shares of the corporation. Robert’s company then would manage the trees for you until 10 years from the date of planting. In this case, that means four years of maintenance is covered. The cost of maintenance after that will amount to about $800 a year.

“As I’ve explained, it would cost Robert attorney and titling fees to reintegrate this land into his main plantation; therefore, he’s willing to sell these packages at a discount. Today, you can invest in one of these packages for $38,000. At that price, and considering the age of the trees, your annualized returns over the next 17 years (assuming full harvest when the trees are 23 years old) would be 12.5%, assuming today’s lumber prices for teak. Any inflation in values from today’s prices would add to that return. In other words, in addition to every other good thing it is, timber is also a great hedge against inflation.

“Again, there are only two of these packages available…and, as they say, Robert ain’t making anymore of them. If you’re interested in more information about this limited opportunity, please send me an email at lief@liefsimon.com.”

Kathleen Peddicord

Comments