Unlike, for example, oil, forests are a long-term and sustainable way of investing. Forests have a yield that is significantly more reliable and which also has a relatively low risk.
In addition to this, there is also a correlation that is lower, but how should you go about investing and does this mean that you have to buy land?
So, how do you invest in forests?
You do not have to buy land to be able to invest capital in forests. A simpler approach is to invest in forest funds or shares that are in a forest company instead. It is not uncommon for forestry companies of various kinds to also be partners in papermaking or sawmills.
By choosing a forestry company, you can thus invest your money in more than just trees and land in itself. It gives you a portfolio that is more balanced.
Investing directly in forests is not the easiest thing for the average private individual.
The reason for this is simply because it requires a relatively large amount of capital to get started and you can not expect to get a quick return.
The return in this case can take a long time. Forest investment also means that you may need to handle maintenance and operation.
It is not uncommon for forest owners to require this in order for you to be able to “use” the forest and for many this can feel daunting.
Why buy shares in forest?
Forest stocks are often a safe and stable type of stock. Forests are a so-called real asset. It is the opposite of a financial asset, you could say.
When you own a forest or forest shares, you have an ownership in something that is really concrete.
The forest stands where it stands. It is growing. It is insured.
By buying shares in forest, you can invest in the forest industry without having to buy forest yourself.
The forestry company manages the forest, thins, fells and plants new trees. Usually, forest companies also process the raw material into pulp, paper, cardboard, packaging or hygiene products.
Some companies in the forest industry have a broad product portfolio, others are more niche.
The price of forest certainly varies, but it is not really that much affected by economic fluctuations. The long-term trend is still up in most places.
On the other hand, the forestry companies’ processing operations are more or less sensitive to the economic cycle.
A forest share that has a large proportion of forest and hygiene products (eg toilet paper) is less sensitive to the economy than a company that invests more in packaging solutions and cardboard.
Why then should you buy shares in the forest? Here are some arguments:
- Demand for paper, wood products, biofuels and environmentally friendly materials is increasing.
- The amount of forest in the world is decreasing, which means that the price is likely to rise in the long run.
- You want to diversify the portfolio towards real assets. You can do this through forest shares or real estate shares.
- You want to increase the proportion of defensive stocks in your stock portfolio.
- You believe that the forest industry is undervalued and facing a boom.
- You want to own a forest, but think it is too much work to own it directly.
Disadvantages of forest shares instead of directly owned forest
If you have experience and knowledge of managing a forest property, you will not be able to perform and benefit from it when you invest in one of the large forest shares.
You will also not be able to work out in the woods that your share owns and will sit more as a passenger when the company manages its operations.
My Top 3 Ways to Invest In the Forest
1. Invest in forest funds
If you do not want to invest directly in forests, you can instead buy a forest fund where a fund manager manages forest holdings and buys shares in forest companies.
If you want a fund with 100% exposure to forests, then I recommend Skogsfond Baltikum is an alternative.
The fund invests in forest properties in the Baltics where prices are much lower than in Sweden. The goal for the fund is to deliver 7-9% in annual average return (I recommend swedish funds because I am swedish myself and I have the most experience with those funds).
2. Invest in listed forestry companies
Investing capital in a listed forestry company is an excellent alternative for those who do not want or do not have the opportunity to buy land or own forests.
Perhaps the main advantage of this method is that the market value is higher than the value of the forest that has been booked.
For the novice, this may not say much, but simply put, it means you can buy forest at a discounted price.
In addition to this, it is a very simple way to actually get a share of the reliable return that the form of investment has.
Forest investment, on the other hand, also comes with risks. One risk is that the stock market is easily affected by fluctuations that may occur in currency.
These are mainly currencies such as GDP, USD and EUR.
To ensure that you can get a better evenness over time, you usually invest in working with currency hedges that are long.
Another risk is planned shutdowns.
These can occur at regular intervals and involve the forest companies optimizing their operations. For example, it could be that they service sawmills, which can cause a negative effect on your investment.
One piece of advice is to look at developments over a year and not quarterly.
3. Forest shares
We understand that it can be a bit complicated to go out and buy forest, but through forest shares it will be easier for you to invest your capital in the environment and nature.
One of the main advantages of choosing shares over own land is that you do not have to think about insurance, felling and planting.
You can hand it over to the landowners instead. It is also much easier to sell a share than if you had to find a buyer who is interested in your forest property.
Shares in the forest are thus a much more flexible alternative and a way to take part of the return without major hassles.
Shares in the forest, on the other hand, are not only peace and joy, but there are actually disadvantages to choosing shares over buying the forest on your own.
One of these disadvantages is that you will not be able to use your own knowledge and expertise (if you possess one) to manage the forest in which you have invested capital, nor will you be able to be in the forest and work.
It makes you a passenger. Some prefer this, others do not.
Buy forest property as a private person
Buying a forest property as a private person can be a bit tricky. To begin with, you need to check whether the forest is within a sparsely populated or re-rounding area.
If you were to answer yes to the question, you need to contact the County Administrative Board to obtain an acquisition permit.
However, this does not apply if you already live in the municipality in question.
Just like when you buy a home, there is a realtor in the picture. However, it is not the highest bidder who will automatically win the forest.
The seller has the right to choose who he wants the forest to be able to buy from. It is often nearby farms where the owners live in the locality that get the chance to acquire the forest property.
If you are the lucky winner, a purchase contact is written and then a purchase letter on the day of entry.