The Problem with Teak
Teak is one of the most popular and valuable of all the tropical hardwoods. Although it is not the most abundant, because of its beautiful appearance, natural disease resistance and workable grain there is huge demand from China, Japan, Europe and USA. Over the years teak has become something of a byword for all that is wrong with the tropical timber industry. After generations of bad forestry management, unregulated markets, agricultural expansion and illegal logging, teak supplies were decimated right across the natural range of Thailand, Myanmar, India, Indonesia and other parts of south east Asia. If you want to know why the orang-utans are disappearing in Malaysia, look at your teak outdoor furniture, unless it is from a sustainable forest, and also to a large degree the palm oil in your soaps, food and cosmetics.
- Investment in forestry has retained a good level of return over the last 10 years, even through these recessionary times, with an increase average of 6.5% year on year for the past 10 years.
- Figures from Thailand for example show that the area of teak forest shrank by 93.5% between 1954 and 2000. In fact, Thailand has become a net importer of teak, whereas it was once one of the world’s leading exporters.
Of course, this is old news now. Illegal and unsustainable practices still go on, particularly in Myanmar, but most of the above countries now have strict regulation regarding teak logging. There is a concerted effort to reforest these areas, and not only for environmental reasons. Tropical hardwood production has long been an integral part of the south Asian economy and the race is on to develop sustainable hardwood markets that can meet the constantly growing demand for tropical timbers.
There are now large areas of teak plantation outside of the natural range. Central and South America in particular have huge plantations. Take Ecuador for example. Teak was introduced into Ecuador in the 1940s but it took a while to become a viable product of the country. Between 1987 and 1997 the total area of teak plantation in Ecuador increased 25 times from 1,000ha to 25,000ha.
Recent innovations in forestry management practices, and in particular in the science of tissue culture, have led to teak plantations being much quicker to mature. The problem with hardwood forestry has always been the time factor. Wood is, and always will be, a perfectly sustainable resource, but even in coppices and plantations teak has a maturation time of around 40 years. It is hard to attract private investment in a world where investors expect a much quicker return on their money.
New husbandry techniques however can harvest teak on 10-20 year cycles, making it a much more interesting proposition for the private investor.
Teak is a deciduous tree which will grow to a height of around 40m (131 ft). It offers a timber with many excellent properties such as a nice grain and texture and inherent oils and silica to help with pest prevention, weather resistance and outdoor uses. Harvesting can be anywhere from 10 to 20 years which is far better than the slower growing species which used to take around 40 years. Teak is a tropical hardwood found in warm countries such as Malaysia, Indonesia, India, and Burma who currently produce approximately one third of the world’s teak timber primarily through forest deforestation.
Teak is fantastic for outdoor uses such as boat hulls, boat decks, home decking and outdoor furniture.
How to invest in teak
Teak investment is a tricky game sometimes as there are a myriad of companies providing a method of investment all with their own terms and conditions. These are the questions to ask yourself:
- Is this investment SIPP approved?
- Is the company I am dealing with based in the UK or at least has an office here?
- Can I meet with the people in this company at their own offices?
- Where exactly is the teak forest I am investing in? Places like Burma (Myanmar) do not offer the same openness to visitors as say Indonesia and their governments are quite different. Depending on your investment levels you might want to go and visit the plantation.
- What security does the fund or UK company have over the teak? Do they actually own the land or is it leased? What guarantees do they offer you the investor?
- How much land do they hold? The more the better usually. If this is a small holding with a new company it might be best to think again.
Case one warning
Check your figures. We found this claim here at forestry-investment.org and clearly maths is not their strong point. They state that an investment of £30,000 will buy you 100 ‘tissue culture’ teak trees planted in 2004. “This is projected to return you £158,000 over a 10 year period at 6.5%”. Do the maths; at 6.5% per annum the answer is $56,314 in total – check the maths with an online investment calculator or Excel. How would it ever be £158,000? Imagine buying a house for £30,000 and it being worth £158,000 in 10 years – unlikely as a return of $158,000 is approximately 18% return per annum.
That being said other investment firms such as WillowRivers.com offer a similar scheme and predict a 19% IRR (IRR is the internal rate of return) over 12 years. Let’s see how their maths works out:
WillowRivers.com require an investment of £15,000 now for 50 maturing teak trees. Then you pay £4,500 for all management and maintenance (no mention of insurance). Total investment is at £19,500 over 7 years so we assume that extra £4,500 is spread over those 7 years. They forecast a ‘sawn wood return’ of £73,896 assumed to be in year 8 which they state is a 19.1% IRR.
We did the maths and calculated 19.88%, this figure can change slightly depending on when you assume cash flows in and out, for example at the start or end of the year. So WillowRivers got it right, this is a great IRR and worth investing in if you believe the final sawn wood returns projection is correct.
There are many investment opportunities in the teak industry. But, as always, do your research. There are stories of exaggerated claims, both in terms of expected yield and also in terms of running and servicing costs.
‘The Green Investment’ offer a Thai based scheme where the investor buys ownership of standing trees, increasing the speed of return. The investor is then responsible for the management of that resource which is normally carried out by the onsite management team. The total term of the investment is 11 years with returns projected to be 15% IRR.
Teak investments can be a sound medium to long term investment that not only makes financial sense but that makes a real environmental difference too.
- Bamboo investments
- Forestry investment
- Ethical forestry investment
- Global forestry investments
- Renewable energy investment
- Timber investment
An alternative field to investing in teak is the main green investments which include trading in emissions or carbon, solar and renewable energies.