How to understand Teak Investments

Teak Investments - An Intransparent Market

Teak is a prime tropical hardwood and requires 20 to 25 years to grow in a commercial forestry plantation. The plant origins from Asia but right now teak plantations can be discovered in a variety of tropical climates such as Central and South America, Asia and Africa. Teak investments in a plantation are stated to be 1 of the most attractive investment opportunities in the extended term, avoiding deforestation of natural prime forest and producing investor returns in excess of 10% and thus are claimed to beat the stockmarket.

When searching at concrete on the market teak investment opportunities, the individual investor is faced with a jungle of different providers and 'Best Buy' choices. Undertaking a suitable comparative analysis is tricky, requires too substantially time and also there is a lack of information producing it extremely tough to actually understand and evaluate the available possibilities. For the non-specialist it is practically impossible to compare the varied teak investment offerings and shortly the investor is lost and faced with the only choice to trust in whatever he was told.

IRR

Most teak investments highlight the return possible of such investments and use the Internal Rate of Return (IRR) as best proxy (or sometimes also referred as the Return on Investment ROI). The IRR is a subjective forward-looking estimate, derived from expected money flows. Showing a stream of cash in and out flows does not necessarily mean the financials are put in stone, in contrast those estimations are heavily dependent on the underlying assumptions. For teak, only a couple of assumptions already define most of the money flows:

- Cost inflation estimate

- Base selling price assumption per m3 of teakwood

- Commercial timber volume of a tree (in m3)

- Thinning schedule

Inflation is difficult to estimate going forward and in some instances historic data is getting employed for justification purposes. Just to mention, supply and demand dynamics in the future may possibly be particularly various from the past though a base selling price ought to correspond to a realistic achievable cost presently observed in the target market place.

To estimate expected timber volume, the tree diameter is of especial relevance when getting into an existing plantation. On the other hand, even if the diameter appears superb, the trees should really be straight and really should have adequate space to grow to maximize the commercial value.

The thinning schedule defines when commercial thinnings are produced to take out the poor trees and leave alot more space for the good ones to grow additional (natural selection). In order to have a commercial value, the wood needs to have a certain age. For estimation purposes, setting the thinning schedule earlier on, positively impacts IRR, because the investment horizon is shorter.