How to understand Teak Investments

Teak Investments - An Intransparent Market place

Teak is a prime tropical hardwood and needs 20 to 25 years to develop in a commercial forestry plantation. The plant origins from Asia but today teak plantations can be located in a variety of tropical climates such as Central and South America, Asia and Africa. Teak investments in a plantation are mentioned to be 1 of the most appealing investment opportunities in the lengthy term, avoiding deforestation of natural prime forest and generating investor returns in excess of ten% and thus are claimed to beat the stockmarket.

When searching at concrete readily available teak investment opportunities, the individual investor is faced with a jungle of completely different providers and 'Best Buy' solutions. Doing a correct comparative evaluation is challenging, demands also much time and also there is a lack of data generating it particularly hard to truly understand and evaluate the readily available solutions. For the non-professional it is almost impossible to compare the different teak investment offerings and shortly the investor is lost and faced with the only solution 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 ideal proxy (or sometimes also referred as the Return on Investment ROI). The IRR is a subjective forward-searching estimate, derived from expected cash 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:

- Price tag inflation estimate

- Base selling value 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 situations historic information is being utilized for justification purposes. Just to mention, supply and demand dynamics in the future might possibly be particularly several from the past while a base selling price should really correspond to a realistic achievable price tag at the moment observed in the target market.

To estimate expected timber volume, the tree diameter is of especial relevance when buying into an current plantation. However, even if the diameter appears superb, the trees will need to be straight and should really have adequate space to grow to maximize the commercial value.

The thinning schedule defines when commercial thinnings are made to take out the poor trees and leave additional space for the good ones to develop further (natural choice). In order to have a commercial value, the wood needs to have a particular age. For estimation purposes, setting the thinning schedule earlier on, positively impacts IRR, since the investment horizon is shorter.