KEY POINTS:
Forestry, where money really does grow on trees, is something that investors hear little about these days.
But tucked in between the endless displays of home ventilation systems and aluminium joinery at the Auckland Home Show last weekend was a solitary forestry investment stand.
It was a far cry from the early 1990s when investors couldn't get enough of forestry investments. Projected log prices proved not to be as high as the salespeople claimed they would be and the investors didn't get the untold riches they were hoping for.
Forestry companies are no longer jockeying at public events for your money. But many still operate - the majority of which sell parcels of shares on the secondary market for those who cannot hold their investments to maturity.
With the disappearance of Carter Holt Harvey and other companies from the NZX, getting exposure to forestry isn't easy through listed companies.
For most investors, forestry as a means to diversify their investment portfolios usually involves syndicated ownership of land and trees from companies that manage the forest investments.
For taxpayers, forestry syndicates do have some advantages. The costs come in the early years and can be written off against your personal taxes.
Neil Tier, head of Auckland tax practice at Grant Thornton, has invested in forestry himself. His investment is held in a partnership structure of loss attributing qualifying companies (LAQCs), which allow the on-going costs of running a forest such as pruning, insurance, management company charges and so on to flow through the LAQC and be offset against his personal taxes.
The profit comes after 25 or 30 years when the forest is harvested. In the meantime, the downside is that the yield is nil and that the value of the investment can be volatile. Investors are at the mercy of international log prices.
Murray Weatherston, director of financial planning firm Financial Focus New Zealand, also owns shares in forestry syndicates himself, but doesn't recommend them for clients. "I think the time horizons are too long for most people."
Whatever the investment, an understanding of the key drivers in the industry is essential. For complete beginners, there is a wealth of information on Forest Enterprises Ltd's website forestenterprises.co.nz, but investors should make their own investment decisions as there are many others to choose from.
Buyers should also be aware that most of the big players aren't buying new land and planting trees, says Owen Springford, director of Southern Forestry. Back in 1991 when legislative changes made new forestry plantations easier and rural land prices were significantly lower than today, it made economic sense.
While the land prices may be at a historic high point, the forestry industry is at a low ebb. Those with a counter-cyclical approach to investing may find that they're getting in at the right time, says Steve Wilton, business director of Forest Enterprises.
That brings investors to the question of what they're investing in. To a certain degree, it is land, in the way a farmer ekes out a living until he sells and makes his money from capital gain.
One factor that could change the industry enormously is carbon credits, says Springford. As a carbon absorber, plantations could earn a cash flow by selling credits - so much so that they wouldn't be harvested after the projected 25 or 30 years because the value lies in the credits.
But forestry and its future is highly complex, says Robert Oddy, director of International Financial Planners, and a single factor such as increased Chinese demand for logs or the effect of carbon credits doesn't mean the industry will thrive.
Before investors consider forestry, they need to believe in the long-term viability of the industry, says David Rhodes, chief executive of the New Zealand Forest Owners' Association. "I believe there are sufficient international market signals to indicate the demand for wood as a commodity is going to increase substantially in the medium term and that should increase the returns for forest investors."
The association believes the industry is at a turning point where the traditional benefits from forestry, which is essentially wood production, could potentially be overtaken or enhanced by returns from carbon credits.
When Tier bought his parcel of land and trees in the 1990s, forestry investment companies were proliferating and investors were dazzled by the annualised return figures, discounted cash flow models and other statistics.
Instead of receiving an annual yield, that money was rolled up along with capital gain to be realised at the end. "For $15,000 or $20,000 down, a $100,000 return had the attraction of being something a bit different," says Tier. In his case, the investment, which is through Forest Enterprises, is a bit of a "bottom drawer" thing.
Tier said that, in part, forestry investment got a bad name because of a number of tax avoidance schemes that hit the headlines when they were taken to court by the Inland Revenue Department. These days, he says forestry investment tends to be much more straightforward than the tax-driven companies that incurred the IRD's ire.
Another government department which has seen red over forestry investment in the past is the Securities Commission, which in 2001 ordered promoters of forestry investment schemes to clean up their offer documents and issued another warning in 2002.
