Forest as an investment: hype or green investment?

Forest as an inflation-proof deposit component?

Climate changes, drought summers and bark beetles have contributed to forests in Germany suffering. They — and therefore our entire ecosystem — are also at risk worldwide. It is obvious that even as an investor, you want to do something good by investing money in forest areas and thus being able to achieve a double return: an ecologically good conscience and possibly green sign in the portfolio.

This is because the environmental conditions for forest investments are generally positive. On the one hand, trees remove the greenhouse gas CO₂ from the atmosphere and can thus make a valuable contribution to the fight against climate change. In addition, timber prices in Germany rose significantly in the past year. This is because the raw material is an important building material and a comparatively sustainable energy source, which is also experiencing high demand due to the energy crisis.

So was the Index of producer prices of logging products from state forests in March 2022, with a level of 99.7 (out of 100), 2.9% higher than in the previous month and 33.3% higher than in the previous month.

In general, forest investments have the reputation of being particularly stable in value, as wood is a real tangible asset. As a result, this asset class barely correlates with developments on the stock markets or economic policy crises.

These advantages of forest as a stable and sometimes lucrative portfolio component have Endowment funds from elite universities As Harvard recognized a long time ago. But more and more private investors also see wood as a “fast-growing” investment opportunity.

Comparing forest investment opportunities

There are essentially four forms of investment in Wald: direct investments, stocks, funds or indices, and digital shares.

Direct investment

Direct forest investments are particularly popular among wealthy private investors and universities who “have staying power.” In doing so, the investor buys a piece of forest, allows it to grow and manage. The return is primarily derived from three sources: the sale of timber from forestry use, the increase in land value at the end of the investment period and the possible lease.

However, to get the full return, investors must be patient. This is because the final payout is only made when the trees that have grown on the property have been cut down and sold. High investments with very long maturities of 15 to 30 years are therefore the rule. However, direct investments in wood have the advantage of being relatively stable in value and protected from inflation — if there are no problems within the investment horizon, such as droughts, storms, fires or pest infestations, which, in the worst case, can lead to a total loss.

Indirect forest investments via stocks, funds or timber certificates offer a diversified and correspondingly lower-risk alternative.

Forest stocks, indices and funds

In contrast to direct investment, investors in forest stocks, indices or funds do not invest in individual trees on specific areas of land, but in companies. They buy forest properties, reforest them and produce wood.

The publicly traded industry giants include, for example, the American forestry company Rayonier. As one of the largest private landowners in the USA and New Zealand, the company mainly produces timber, paper and pulp. The also US-American group is even bigger Weyerhaeuser: The company manages 9.9 million hectares of forest, 4.3 million of which are in the USA and the rest in Canada.

But even forest shares and other securities do not protect against the risks of total loss: For example, the public limited company Lignum Sachwert Edelholz promoted returns of more than seven percent per year. Around 3500 investors invested around 70 million euros — before the AG had to initiate insolvency proceedings in 2016.

Digital shares

Digital forest shares, on the other hand, combine the best of both worlds: high liquidity, low investment amounts, short terms and attractive return prospects. To this end, investors invest as little as 500 euros in tokenized bonds, which represent an indirect investment in forests. In this way, investors can invest in various forest projects in a low-threshold and diversified manner and thus distribute their risk and maximize return opportunities.

Green investment or grey area?

Investors who want to invest in forests or timber must look closely in many cases. Because there are many grey areas when it comes to green investments. Investments in foreign forests in particular involve a high degree of lack of transparency and, as a result, major risks. In addition, there is often no prospectus requirement abroad, which makes projects even more opaque. For German providers, on the other hand, the prescribed sales prospectuses and investment information sheets are filed by the Federal Financial Supervisory Authority (Bafin).

In summary, interested forest investors should note that direct investments represent risky and comparatively difficult to trade assets. On the other hand, shares of forest companies, funds or digital forest shares of BaFin-regulated German providers are significantly more liquid.