Farmland / Timber Funds

AnotherJoe

Computer_Beginner wrote: »

I've been considering agricultural land and timber investment as a future diversifier

There must be many other areas you can invest in that are less mainstream but still much more transparent and far less subject to fraud than forestry and land. From what I've seen the risks are very high and the returns don't match the risks.

Just a few to consider ;P2P, REITS and similar that invest and manage in property, usually commercial but sometimes houses. Precious metals. VCTs of various sorts.

Computer_Beginner

Apodemus wrote: »

Tell that to all the plantation owners having to change felling plans and rushing to harvest in the face of disease at the moment!

They are also having to harvest a crop against an economic and infrastructure backdrop that is very different from when the planting decisions were taken in the 70s. For example, industry-standard haulage trucks are now at least 50% heavier than they were when planting decisions were made, which is fine if you invest in a plantation beside a main road...not so great if your investment is up a remote glen, where the bridges now have a 7.5 tonne weight limit!

Only invest in forestry if you really know what you are doing!

Interesting.
I've read about the relationship between distance between saw mills and plantation and how that affects profit (or loss!) from timber harvest.
I hadn't considered the change in logistics since planting though.

I grew up in an area that had forest blocks, so I've always had an interest.
Back then it was all nationalised Forestry Commission. Then a few years back I started to see 'woodland for sale' signs going up. Despite growing up in the area, I'd never actually met anyone who'd bought one of these plots - so I looked online. I got the impression that it was mainly 'lifestyle' buyers. It didn't seem like many were aiming to make a profit. From what I've read the cost of felling can often exceed any profit from the timber (due to the logistics you mentioned). So a negative yield in effect.

The money side is interesting in that a 100 acre block may sell for £100k (ie £1k / acre). But if it's then divided up into 10 x 10 acre plots, each may sell for £20k. So a total of £200k.
Good money for whoever buys, divides and sells (minus legal fees etc). But then the smaller plot owners have magnified logistical issues - especially with access etc. So the economy of scale has been lost.

It seems the equivalent of buying a large farm and dividing it up into allotments. ie more a 'lifestyle' / 'hobby' than a proper business.

This seems to be the opposite of the general trend eg smaller shops being overtaken by large supermarkets. So has forestry as a proper industry been given up on (in the UK at least)?

The other factor is the value of the land itself (ignoring the trees on it). Maybe some of the smaller plot holders will make gains purely by the general uplift in land values? But that seems to have peaked now.

I'll just watch from the sidelines for now!

Computer_Beginner

bostonerimus wrote: »

Buying into a niche sector can be a fast way to lose lots of money. Stick to well diversified global equity and bond funds. Don't try to get clever. - keep it simple and commit to the long haul.

I think you're right.
I'll stick to the mainstream investments.
If I get rich one day, I may buy a small forest plot for 'fun'!

Computer_Beginner

Zanderman wrote: »

I've no experience of investing in this sort of thing - but I do know a bit about agriculture and land management.

I wouldn't put my money anywhere near it!

It's a high risk area - lots can go wrong.

The future of it is very unclear with Brexit looming - the future financial basis of all agricultural practice is unknown now - all the current certainties have become uncertainties. There could be a huge crisis ahead.

Plus you need to know exactly what you're doing, so it's not suitable in any way for a novice.

And forestry investments in particular have, as you acknowledge, a long and ongoing history of scams.

I'd steer well clear.

Thanks.
That's interesting. I hadn't considered Brexit uncertainty.

From a logistical perspective I can't see it being economical to transport timber from Scotland accross the channel to Europe, when there are massive forests in Germany, Poland etc which are much easier to access and manage.

Which really only leaves UK housebuilding as the demand for pine timber...?

Zanderman

Computer_Beginner wrote: »

Thanks.
That's interesting. I hadn't considered Brexit uncertainty.

From a logistical perspective I can't see it being economical to transport timber from Scotland accross the channel to Europe, when there are massive forests in Germany, Poland etc which are much easier to access and manage.

Which really only leaves UK housebuilding as the demand for pine timber...?

You're missing my point, which was that agriculture in general, including forestry to some extent, relies on subsidies, many of which are initiated by the EU. On Brexit those subsidies will no longer be a certainty. They may be replaced with better ones, or worse ones, or not replaced at all. No one knows.

I wasn't referring to trading in the end product.

Computer_Beginner

Zanderman wrote: »

You're missing my point, which was that agriculture in general, including forestry to some extent, relies on subsidies, many of which are initiated by the EU. On Brexit those subsidies will no longer be a certainty. They may be replaced with better ones, or worse ones, or not replaced at all. No one knows.

I wasn't referring to trading in the end product.

I see what you mean now.
Yes, govt subsidies / interventions make this a complex area.

Malthusian

Zanderman wrote: »

The future of it is very unclear with Brexit looming - the future financial basis of all agricultural practice is unknown now - all the current certainties have become uncertainties.

Forgive the pedantry but if they became uncertainties they weren't ever certainties in the first place. A better illustration of political risk is difficult to imagine.

Computer_Beginner wrote: »

Yes, govt subsidies / interventions make this a complex area.

It doesn't. What makes it a complex area is that it's an industry. All industries are complex. All industries are subject to government policy, interventions and political risk in general. Financial services, alcohol / tobacco, groceries, logistics, healthcare... there is not a single industry which could be described as "simple" and where someone who works in the area could not happily babble on to you for hours about the issues du jour and the numerous uncertainties and complexities of working in it.

To an investor these complexities should be as irrelevant as the direction of an individual snowflake in a snowstorm. This is why a portfolio needs to be diversified and as simple as possible.

What was it in particular that attracted you to this area where values are at an all-time high and yields are less than cash with considerably more risk, driven by a tax break which (presumably) isn't relevant to you?

The other issue I've encountered is that forestry investment schemes seem to attract scams, seemingly to a greater degree than (more standard) equities. Why would this be?

Because people are prepared to believe logic along the lines of "it's physical land so I guess I can't lose my money" and "everyone always needs wood so I guess it must be possible to guarantee 8% - 12% per annum".

I can claim that I can consistently generate 8% per annum without risk to capital by investing on the stockmarket and history shows that some people will choose to believe me and give me their money. However, there are 2 problems with my story: 1) everyone, even complete novice investors, can see the stockmarket going up and down on the Ten O'Clock News 2) equities aren't tangible and I'm relying entirely on my patter to convince investors that the opportunity is real.

However, if I instead claim that I can generate 8% per annum from forestry, storage pods or hotel rooms without risk to capital, then 1) they don't talk about the returns from forestry / storage pods / hotel rooms on the Ten O'Clock News so my claim is easier to swallow 2) there's a physical asset involved so investors can say to themselves that they can't possibly lose because the physical asset is real.

Therefore I recruit a higher number of marks with an investment scheme involving forestry than one involving equities.

I can even show some of the choosier marks around the hotel / forest / self storage facility, after which they'll be happy that they've "done their research".

Computer_Beginner

Malthusian wrote: »

What was it in particular that attracted you to this area where values are at an all-time high and yields are less than cash with considerably more risk, driven by a tax break which (presumably) isn't relevant to you?
".

A possible future diversification from equties, an alternative to bonds. Not directly related to currency devaluation risk. Some yield (as opposed to gold).

At the moment land looks overvalued, as you say. My logic is that by doing my research now, I will be better informed when / if the market changes and land starts looking cheap again.

Direct ownership does not appeal to me, as the IHT break is unhelpful and the increased costs associated with small scale. A fund would be better as it allows ISA / pension wrapping, diversification, liquidity etc.

Computer_Beginner

Malthusian wrote: »

It doesn't. What makes it a complex area is that it's an industry. All industries are complex. All industries are subject to government policy, interventions and political risk in general. Financial services, alcohol / tobacco, groceries, logistics, healthcare... there is not a single industry which could be described as "simple" and where someone who works in the area could not happily babble on to you for hours about the issues du jour and the numerous uncertainties and complexities of working in it.

To an investor these complexities should be as irrelevant as the direction of an individual snowflake in a snowstorm. This is why a portfolio needs to be diversified and as simple as possible.
".

I agree.
Similarly, using logic I can see that McDonalds is doing well because it's always busy.
However, I don't know all the details of their debts, franchise agreements etc.
So putting all my money in McDonalds shares could be considered less wise than diversifying with companies I've never physically seen / experienced before.

Right now, I cannot imagine McDonalds going bust. Because I can see with my own eyes it's always busy.
But 20 years ago, all the pubs in my town were absolutely packed every weekend. People queing at the bar to get served beer at £1 a pint. (Why they didn't stick the prices up on a Saturday night I'm not sure. People would still have paid.)

If someone had said 20 years ago that most of those pubs would be shut today (due to a lack of business), they would certainly have been considered crazy. It was considered a fact that men would always want to drink beer in a pub.

If someone had predicted that men would just buy beer in a supermarket and drink at home, the obvious counter-argument would have been that supermarkets existed 20 years and beer was cheaper in those supermarkets back then too.

So a sector that seems rock solid today can be gone in 10-20 years.

Computer_Beginner

Malthusian wrote: »

"it's physical land so I guess I can't lose my money"
".

I think the logic, which I understand, is that it's physical land so it can't disappear.
A field can't be stolen like a gold bar and it can't be 'dissolved' like a company.

What can happen is that it can be occupied against the owner's wishes. It can be subject to agreements of use (such as agricultural tenancies). Or the court can take the ownership off you because you've been sued etc.

So whilst the existence of the physical asset is assured (unless it gets covered by rising seas etc!), any ownership / benefit you may get from it is not 100pc guaranteed.

It can also drop in value and you, as the owner, has lost the opportunity to have put that money into tech stocks instead. Opportunity cost.

I read a saying once: ''turn your paper into metal and your metal into dirt''.

Basically this is saying; take your paper wages and exchange them for physical gold / silver. Then once you have enough coins, buy farmland and buy cattle etc.

I think this kind of attitude came from the USA between about 1800-1900 etc.