Key Post Investment in Irish Forestry Funds

The 4th Forestry Investment Fund deadline is approaching and has been discussed in various forums. This is a summary of some of the discussion and relevant links. tedd

Joe Nonety said:
If you've a lump sum, and you want to maximise income with minimum risk then you should invest in the forestry scheme.
You get an estimated 9.6% a year (which has usually been underestimated) , which even accounting for not getting the Government's 25%, means you still out perform all the deposit accounts and probably a fair chance of beating a lot of the investment ones too, especially as there is no management fees and your returns are completely tax free.
Shares are 750 Euros each and the deadline is the 17th May. It is backed by the EU and the Irish goverment which means there is NO chance of losing money, even if all the forests burnt down.
The investment period is 10 years but irish-forestry.ie have set up a free service where you can sell your shares at any time. Its up to you what you sell it for, but obviously selling at 9.6% per annum added to your original investment is the norm.

rainyday replied:
Hi Joe - You're not correct here. There is a risk of losing money. Maybe you can't see the wood for the trees

The risks section of the prospectus document outlines some of these risks. Also, the assumptions on which the returns are based are quite broad. What will happen if land prices go up? What will happen if the 'professional fees/marketings costs mentioned increase?

It is disingenuous (at best) to state that "it's up to you what you sell for". That's like saying "it's up to you what you sell your Eircom shares for". Theoretically, you can sell your Eircom shares for a €5 each provided that you can find a buyer. You will only be able to sell at the price at which you can find a buyer willing to pay.

Note that I know very little about forestry investments, and I'm open to finding out more. However, we need to be very careful that we don't mislead people here on AAM.


Joe Nonety said:
If you have a lump sum, it is far wiser to invest most of it in some high interest account until you need it, instead of leaving it in some current account gaining about 0.5% interest.
A friend of mine was in the same situation last year and invested the lump sum in forestry, while still putting in the full amount of 254 Euros a month into the SSIA.
After 12 months he has withdrawn 1500 Euro from the Forestry investment which has netted him a profit of a cool 140 Euros, tax free, and will continue to withdraw money from his forest investment which has a projected return of 9.6% per annum.

This is just an example, you should check out the various returns banks are giving on lump sums over fixed periods e.g. 6 months or 12 months.

tedd replied:
Hi Joe,

You're obviously a big fan of the Forestry Schemes. I know nothing about them. Would you give me the "idiot's guide" rundown on how they work, what is involved and where the profit originates? Thanks

These are some links for background reading on Forestry investment:

I have done some reading about the schemes and it is true to say that some investors have had good returns.

There are a few aspects that concern me.

1. The fund heavily relies on the use of a number of Irish and EU forestry grants for most aspects of managing their investment. The prospectus cites grants received for purchase, planting, maintenance and road construction in forests. Is there any guarantee that these grants will be available for the duration of the investment? What is the impact on the investment if grant availability was reduced by, say 50%?

2. Who buys the forests? Every 10 years the fund is wound up, the forests sold and investors repaid. I get the impression that the new fund (this will be number 4) buys at least some of the forests being sold by the old fund as the new fund is going to invest in some "semi-mature" forests. What would happen to investors if there is no fund number 5? Is there a risk of a "pyramid-type" situation developing in which former investors can only get their money back if new investors are found? Is there really an established market for such forests? What would the impact on profit if the forests were sold only to commercial interests and no new fund opens?

3. I am not certain it is legitimate to say this is a "government backed" investment, but rather an investment backed by government grants currently available. I have not read of any guarantee by the government to re-pay the investment or part of it in the event of losing money, going bankrupt, fraud, etc.

I would be interested in more expert opinions as mine originates purely from what I have read and I have no expertise in this area.

regards,
tedd

Hi Joe Nonety

I'm growing increasingly concerned by your recommendations for investments in forestry funds in cases where they wouldn't immediately seem relevant, e.g. & . Note that I'm not trying to shoot you out of the water. It's very possible that you're right & we're all wrong. I just don't think you've presented sufficient information to backup your recommendations.

Can you provide a bit more detail on the following;

- Have you any vested interest in the operation that sells/runs these funds?
- Can you clarify exactly what you mean by "Government supported" & "EU Supported"
- Is there any liquidity in the market for selling shares before maturity, i.e. is there a significant number of buyers looking to pick-up these shares

Others may have further queries also.

Regards - RainyDay

Hi Joe - I spent a bit more time going over their prospectus over the weekend, and few more queries arise.

I note that the directors of the fund are also directors of 'IFS Irish Forestry Services Ltd', the company which has been awarded the contract to maintain the forests. This is declared in the 'Material Contracts' section of the prospectus. This company has been awared a fixed price contract (€38 per acre index linked to the RPI). This seems a little unusual. Do we have any evidence of what would be a 'market rate' for this kind of contract? How would the investors benefit from this kind of contract? Would it be normal practice to enter into a fixed price contract for ten years with no variation other than the RPI?

I see from Note 15 to the [[broken link removed]]2000 Annual Account[/link] that additional payments of over €100k were made to 'Irish Forestry Services' to cover 'share marketing' costs and 'commisions on funds raised' - Why would directors be paying another company (which they happen to own) for these services? Have we any evidence as to what services were provided, and what would have been typical market rates for these services?

Is there any information on the actual return received to date on pre-maturity sales from previous funds? Is there any information on the liquidity of this market (e.g. volume of transactions)

Is there any information on the impact of risks like disease & weather on the previous funds?

Is there any business plan (e.g. projected P&L account) available to prospective investors?

Regards - RainyDay

I have read comments made regarding the Forestry Investment companies in which I am involved. I hope that this discussion board allows me to answer the queries raised.

"What happens if land prices go up?"
If land prices increase during the investment period, this will benefit the investors as it will add to the underlying asset value and therefore be returned as a capital gain in the hands of the shareholders.

Currently, land prices are static and we have been able to purchase land at an average price lower than that anticipated. This means that, as the projections are a direct function of the amount of lands under forestry, we are now ahead of that projection.

"Professional fees / marketing costs....
We are obliged, under the terms of the Prospectus, to keep to the costs as laid out.

"Grant aid availability..."
It is true we do rely heavily on grants. The grants that we rely on are from the CAP which attempts to get more land out of agricultural production. As timber imports represent the second largest import into the EU after oil, these grants are unlikely to be reduced. They were reviewed about 2 years ago and were increased to keep in line with inflation. This was indicative to me that the government and the EU are serious about reducing the agricultural surplus and promoting afforestation.

"Who purchases the forests"
The initial strategy outlined in the prospectus was to purchase both bare land and semi mature planted lands with the monies raised. After the period of 10 years, the bare land planted would be reaching thinning stage and would be income generating, while the semi mature would be approaching clearfell. We, as the management team, will do everything in our power to remain as the forest managers, however, the forestry will be sold on the open market, to ensure that the best return can be achieved. This is the same system as used in other more developed forestry orientated countries, e.g. New Zealand.

"Govt backed investment..."
The Forestry Investment Plans are not Government backed. We receive grants from the Government that, in my opinion overshadow the SSIA.

"Market liquidity..."
It has always been recognised that there would have to be some mechanism for share trading of the forestry funds. Under company law, as public limited companies, shares are freely transferable. To assist this mechanism we provide a matching facility, which to date, has operated extremely well. All shareholders who have sold their shareholding have received at least the return projected and in some cases, very much more.

"Management Contract...."
It is fundamental that the forests are continually managed. It is our aim to have the most productive forests in the country. Having the costs of this contract specified at the outset means that meaningful projections can be produced.

"Disease & Weather..."
Ireland benefits from its island status and this combined with very stringent import controls means that the forests are, in essence disease free. Weather and fire are two issues which are insured against. Through careful site selection and proactive management of the forests, both these issues can be minimised.

Finally, our aim is to break down the barrier to entry that is the high initial cost of forestry investment (minimum investment approx. €100,000), to allow more modest investors take advantage of the inherent value of this form of investment.

If there are any further queries, please do not hesitate to contact us at info@irish-forestry.ie or phone us at +353 1 2841777

Declan Kennedy
Director
Irish Forestry

Hi Declan,
Thanks for taking the time to answer so comprehensively. I hope you'll check in at AAM from time to time to answer other questions that might come up.

regards,
tedd

Hi Declan - Great to have you on board. Would you care to comment on how the costs for the services which are outsourced to the IFS company (of which you are also a director) were benchmarked. As a potential investor, I would be concerned about the nature of these contracts. If it makes sense to outsource this service, then I'd have though it should be outsourced to independent parties via a competitive tender process to ensure best value for investors. If this service is critical to the success of the overall venture, I'd have thought it should be insourced to employees of the fund.

Regards - RainyDay

Re: Advertising by Irish Forestry Funds

Did anyone else notice the ad's for the 4th Forestry Fund in last weekend's papers? They had a cute chick (of the feathered variety) with a nice line about 'feathering your nest'. I'm quite concerned that they quote a '9.6% pa return' without highlighting the fact that this return is estimated. Unless/until the consumer gets the full prospectus and reviews all the small print, they may well miss the fact that these returns are NOT guaranteed and are dependant on a large number of variables, e.g. weather ...

Sounds like one for the ASAI, I reckon.

Hi Rainyday

I saw the ad too and cut it out with a view to posting about it here, but I never got a round tuit. The ad was very misleading and, knowing the guys in the Forestry Fund, I was very surprised by it. It did them no favours. I think the fund is a well run, honest fund, but misleading advertising damages their reputation.

Brendan

Good to see that the ASAI have [broken link removed] against this ad - I did see some subsequent ad's which included the term 'projected return'

see Sunday Indo's verdict on the Forestry Investment funds - a fairly balanced view, I reckon.

Forestry Funds

Rainyday

I also would have some major concerns about these schemes.

Up front let me say I have some involvement with the forest industry but have never had any involvement with IFS, or any competitor of IFS. I also think that forestry is potentially a very attractive investment, because it is low risk, has predictable cashflows, is tax efficient and has proved to be a good hedge against inflation and the general economic cycle.

My concerns specific to this scheme are summarised below. It is possible that these are based on a misunderstanding of the scheme, but any understanding I have is based on the prospectus for the sixth plan (I think the most recent).

1. The Market for semi Mature Forests
A major premise (if not the single biggest premise) in these investments is that the assets will be liquid at the end of the 10 year investment period. The prospectus claims that there is “an emerging and vibrant market” for semi mature woodland. I don’t think that this is the case, in fact IMHO there is little evidence of such a market developing in the short to mid term on the scale required for these funds. Just go into any commercial estate agent around the country and tell them you are looking to buy or sell 30 ha of semi mature commercial woodland and watch their eyebrows rise.

2. The up front costs of the investment
This appears to be a high cost investment, the prospectus outlines potentially 16.5% costs up front made up of:
&nbsp &nbsp &nbsp &nbsp Commission – 4%
&nbsp &nbsp &nbsp &nbsp Stamp duty on land – 9% (only applies where land is acquired)
&nbsp &nbsp &nbsp &nbsp Stamp duty on shares – 1%
&nbsp &nbsp &nbsp &nbsp Professional fees and marketing costs – 2.5%

In addition to this (I think?), the costs of establishing the company and raising capital are estimated at €75,000. This is a significant burden for the fund and compares very poorly with the costs of an equity SSIA for example.

3. The costs of managing the forests
Declan Kennedy is correct to insist that the effective ongoing management of the forests is essential to maximise the value of the investment. However as Rainyday points out, it is concerning that this service is contracted to IFS for the full period at an index linked price of €38 per acre. As the Directors of the fund are also the Directors of IFS, I’m sure it wasn’t a difficult contract to negotiate. Regarding the market rates for such services, I contacted one forestry company regarding such services to find that although rates vary considerably (based on e.g. scale, location, access etc.) a reasonable figure for managing semi mature plantations would be in the order of €20 per ha (i.e. €8 per acre!). This is for a basic maintenance service, but AFIK other more intensive activities (such as constructing roads) are mostly grant aided anyway.

4. What happens to the annual Premia
From what I understand of the Forest Service/EU grants scheme, the initial grants are intended to cover the costs of establishing the forests, however the annual premia are intended to provide compensation for loss of income from land that was previously in agricultural use. It is not clear from the prospectus what happens to this income – is it added to the value of the fund as retained earnings, is it invested in more forests, or what? The prospectus indicates that previous funds have raised €21m by way of investment and also €9.7m grants and €8.7m annual premia. Does this mean that before any forest growth is taken into account, the funds have increased by a gross 87.6%? Maybe the literature should clarify this.

4. Control over the investment
This is a major issue for me as an investor. If I invest in shares of a company I get voting rights at the company AGM and therefore have some control over the Directors (in theory at least). Even through a unit fund, I mandate the fund manager to vote on my behalf. In practice this may provide little control, but witness the effect of shareholder muscle on the development of First Active, or recently Independent News and Media, and many others.

These forestry funds are each set up as a PLC, but the investor can only buy Preference shares which “do not have any right to attend or vote at Annual General Meetings”. The Directors of the company however are issued with 40,000 ordinary shares. Essentially this means that after investing in the company the investor has absolutely no say in the operation of the company/fund, and the Directors are given total control (within standard Corporate Governance procedures I presume) to take whatever decisions they feel fit over the ten year term. I think the implications of this are considerable.

I am prepared to accept that I may be wrong in some of my assessments here and am open to correction on any of the above, but even if I am wrong, it doesn’t say much for the available literature.

I think that Declan Kennedy has shown great innovation in developing this product and is to be commended for that, but I think there are some shortcomings in the fund which do not favour the investors.

Again I remain convinced that forestry can be a very attractive asset class in any portfolio of investments providing decent long term returns (maybe not 9.2%) at very low risk.

Sorry that this is so lengthy, but I hope my thoughts contribute to the forum.

Woody

Hi Woody - Great contribution - No need to apologise for length - The devil is in the detail, as always.

To good to be true?

I've posted this reply on another link but rather than have people jumping from link to link thought it might be better to resurrect the old link.

An old addage I've often heard used and which I've always had in my mind when making investents is "If its too good to be true then it probably is". This forestry investment mallarchy seems too good to be true...9% or 10% per annum, they do all the work (no pruning etc) and its tax free. And it seems you can buy in and sell out at will and still it's all tax free.

Apart from the fact that the price of land and trees might fall through the floor (and for the further purposes of this discussion lets assume they won't) and lets also assume the tax concessions remain in place....big assumtions I know but I want to "cut through the trees" (excuse the pun..entirely intended), this scheme seems entirely genuine. Do we have any posters who have invested in this scheme? Are you happy? Would you get a better return if you purchased land and organised the planting of your own trees? Would you get a better return if you directly purchased already planted land. ie in both the above scenarios would the grants available, less the ongoing costs of planting / maintainance etc, produce a greater return than through this scheme.

Anyone out there any experience of either this scheme or directly investing in or managing their own forests?

I understand there is a difference in the return you get as a registered farmer, with a heard or flock number, and that which an ordinary investor might get (I'm talking here about directly own land as opposed to through this scheme).

Private of pooled forestry investment

I've been investing in the Forestry Plans and Funds for about 5 years now. So far, the year end reports suggest that the value of the shares are increasing very nicely. The return (although theoretical I know to some extent) far is much better than any other shares I've held over the same period. Of course this is no guarantee of the final return sometime in the future. Others have pointed out some very valid potential pitfalls in the future, which I'm all too aware of. Having said that though, I'm confident for their future performance.

As regards planting/owning your own forest, the returns are much more attractive if you can prove you derive a certain percentage of your income from farming (I cant remember exactly how much, but it's not as simple as getting a herd number!). But it is something I intend to look into again as ACC bank give loans for forestry investment with very flexible repayments (you pay annually after receiving grant money). I too would love to hear from anyone who has actually followed through with this or at least did a bit more number crunching on it.

Re: To good to be true?

Hi Evergreen - Thanks for your feedback - very interesting. Have you tried actually selling any shares? It would be very interesting to know how the prices available within their grey-market compare to the stated return rates.

Cheers - RainyDay

Selling forestry shares

Hi Rainyday,
I haven't tried to sell any shares (I'm in it for the long haul) but if the IFF website is to be believed, then others have successfully sold shares with profits at least in line with projections.

Re: To good to be true?

Hi Evergreen - Thanks for the update. Based on their [broken link removed], there seems to be a very small number of shares being traded.

Is there any chance you would try a little 'exercise' on behalf of AAM - put some of your shares up for sale & see what offers you get?

Re; exercise

No promises, but leave it with me, and I'll see how practical your suggestion would be.

Re. re exercise

Any buyers yet, Evergreen?
It's been 6 months!