Investment
The Attraction of Brownfield Investments in Teak
Brown and Greenfield Investing
Teak is a prime tropical hardwood, which requires 20 – 25 years to grow in a commercial plantation environment. If the investor enters at project start this is defined as Greenfield investing. The other option, a Brownfield investment, means that a buyer enters later and buys into an existing but older plantation. On the market there are various investment opportunities available at different ages, in teak and other tropical woods, thus providing a wide choice for investors.
Main Risks for Teak Plantations
Teak plantations bear certain risks. From a technical point of view key risks are e.g. the soil quality of the site, the suitability of the location, climate and fire to name the major ones. Normally detailed soil analysis is performed before planting in order to determine the right planting strategy. A plantation manager should be familiar with the site as observation over time can tell best what grows on the respective site. The results of the original plantation strategy become visible in the years thereafter. In most cases the tree diameters are measured and compared towards industry benchmarks to evaluate the progress in growth.
From a financial point of view, main risk is that the management company would run out of money. Teak trees require pruning, thinning and clearing of the underwood for maintenance. Doing this properly ensures that the tree,s commercial value is maximized. However, this comes at a certain cost. Given the project period is 20 – 25 years, strict discipline on cash management is required. In case the plantation manager runs out of money, the investor looses two fold: First requiring additional financing and second the commercial value of the trees might be suboptimal due to savings in maintenance.
Exit Strategies from Teak: The Seller’s Perspective
Like Private Equity, when investing in teak, an investor is required to think about exit: How and when do I sell this investment? – Investing in a teak project offers the following main exit strategies:
(1) Exit at final harvest (20 – 25 years)
(2) Sell the investment to another investor / buyer
Teak investors need to be patient and normally be prepared being invested for 20 – 25 years. The main reason is that as the trees grow, they increase in their commercial value when properly maintained. No cash flow is coming in, thus the investor needs to wait for the commercial thinnings. In order to get an attractive IRR, the investor will have to wait till final harvest. The value of the trees becomes more attractive at older ages and being able to sell large sized logs, thus getting better prices. Therefore, profit maximization requires to be invested till the end of the project, which requires patience and stamina for the investor.
The option to sell the investment along the road is a trickier one. First, the quality of the trees will be clearly visible and thus a potential buyer will pay based on visible results only. In case maintenance has been neglected, or the soil quality affected volume growth, the buyer will take this into account. Second, the market for existing plantations appears intransparent and illiquid. Thus for the seller it takes effort and time to find suitable buyers. The buyer will be very well aware of this and will pressurize the seller to offer a liquidity discount in order to increase his own IRR.
Buying an Existing Teak Plantation: The Buyer’s Perspective
Buying into an existing teak plantation avoids certain risks for the buyer. First, the project,s results are clearly visible and he should bear less risk as soil quality and the suitability of the site can be better assessed. The difficulty lies more in doing the due diligence. Due to a lack of data, a non-sophisticated buyer might need some time to figure out if the said plantation complies to industry benchmarks or not. For the sophisticated buyer such opportunities are much more interesting, since for him he will be better able to provide an estimate of the target harvest volume based on the existing tree diameters. Thus buying into an existing plantation can reduce risk for the buyer.
The second aspect is that in a Greenfield project the ‘lock-in’ period can be up to 20 – 25 years while buying into an existing plantation reduces the holding period for the investor – dependent on the maturity of the plantation, quite considerably. Smaller holding periods mean less risk for the investor. Also, for cash flow estimations various assumptions need to be made (inflation factor, expected selling price and harvest volume). Those assumptions affect cash flow estimations. In case of errors – an estimation in its definition is not be the same as the actual outcome – the difference to reality is less severe for a Brownfield project than in case of a Greenfield project, where initial assumptions have a higher compounding effect and thus can lead to bigger variation from reality.
Conclusion
From a risk point of view it might be smarter to be invested in a plantation at older age. Several previously unknown variables become more clear, the investment period is shorter and the risks should be reduced. However, this approach requires more due diligence and close attention to the price to be paid.
Seven Reasons to Invest in Romania Real Estate Properties
Romania – famous for its beautiful palaces and castles, wonderful liquors and food, Dracula, dazzling women is a beautiful country located in central-eastern Europe. It is the 12th largest country in the Europe. The economy of Romania has shown potential growth in the past few years. Since 2000, Romania has shown a rhythmic growth of 4.5% raised by 8.3% in 2004.
The current economy statement in Romania is steadily increasing the levels of GDP and significantly high levels of Foreign Direct Investment (FDI). The economy investment grade has recently been upgraded by Fitch and P&S. Romania benefits from the rising FDI flows due to the privatization process, and the advantages of its big internal market
Romania is also having a great geographical location at the intersection of some great trade routes joining the Far East with the Western Europe. With population of more than 20 million people, Romania has a large domestic market. After having such great property investment opportunities, Romania is continuously attracting more and more foreign investors to invest in Romania. Stable and encouraging government of Romania is the other reason which is creating great investment opportunities in Romania. The Real estate market in Romania is growing at a rocket speed. Following are some best reasons for investing in Romania.
Reasons to Invest in Romanian Real Estate Property:
1. With strategic and visionary efforts by Romanian government, the economy is becoming stronger and stronger over the years. Romania is one of the fastest growing economies in Europe.
2. Falling inflation and increasing employment are two other boosters of rapidly growing economy. Inflation has dropped to 7.5% low in 2005 from 22% high in 2002. Unemployment rate also fell to 6.2% in 2006 with less than 3% in capital Bucharest which is far lower than the many other developed European economies. With under control inflation and falling unemployment rate Romania is confidently creating the strong property buying opportunities over the country.
3. Foreign investment in Romania is increasing drastically. From 2001 to 2005, foreign direct investment in Romania has reached over 5000 million euros and more 8000 million euros added in 2006. With 55% of FDI in capital city Bucharest, major companies from all over the world are coming to invest in Romania.
4. Along with capital city of Bucharest, other cities in Romania like Brasov, Transylvania, Craiova, Constanta and Iasi are also attracting investors. Transylvania is the Romania’s biggest tourist asset and the expected to attract more investment with immense number of investment opportunities. One more golden opportunity where investors want to invest is in Brasov, the most visited city of Romania. Having facility of international airport, Brasov is also linked with new motorway for fast transportation.
5. Report given by investment experts says that house prices in Romania are expected to increase by 4 times higher over the next 10 years. In past few years, property prices are already raised by 25%. Even such a great rise, property price in Romania are still 20-30% lower than the other eastern European countries.
6. After accession to the EU in 2007, the real estate market in Romania has been influenced dramatically. EU funding to Romania has been invested into the infrastructure development in road, hospitals, schools, bridges etc. EU funds will help to create more jobs and therefore potential customers seeking to buy/rent properties.
7. Low tax rates are the other main reason to invest in Romania. Romanian government has set up a flat rate of only 16% for corporation and income tax. Such low and fixed rate of tax is powering Romania to draw more foreign investors seeking for new business places.
Some other secondary factors are also responsible for great investment opportunities in Romania. Romania has great network of international airports with two in capital Bucharest. Developed and fully facilitate ports in Romania is also boosting its economy drastically. Romania has huge network of telecommunication systems equipped with modern telecommunication equipments. Also there are nearly 48 industrial parks.
As far as it looks, the boom is yet to come! Buying property in Romania will be great ROI in near future. So what are you waiting for? Invest now in Romania for your better future.
How to use Asset Allocation to lower your stock investing risks?
What percentage of my savings shall I invest in stocks? And what percentage shall I invest in bonds or keep in cash or other investment classes like real estate?
The questions in what to invest and how much of your savings to invest are on top of the mind of every investor. Let’s have a look at a much quoted rule of thumb on this topic and what type of tools are available for this on the web.
A much quoted rule
A much quoted rule of thumb and a simplified asset allocation guide on how much to invest in stocks and bonds is the age related rule:
Allocate a percentage of your portfolio equal to 100 minus your age to equity stocks, and invest the rest in bonds. For example, if you were 45 years old, then you would hold 100 – 45 = 55 or 55% of your investments in stocks or stock funds, and 65% percent of your assets in bonds or bond funds.
The background argumentation for this model is that when large cap stocks are held for periods of 15 years or longer, they in general have a better return than bonds. But because of the higher fluctuations in stock prices than in bond prices, stocks offer a higher risk and should be a smaller part of your investments when getting closer to retirement. The assumption is that you need the money when you retire and you cannot afford then that your stocks have lost a lot of value.
The following issues are often highlighted around this simplified model:
- It only takes into account two assets classes: stocks and bonds. It does not take cash, real estate funds and the difference between large and small cap stocks into account?
- It looks upon bonds and bonds funds as part of the same class while both have considerable different characteristics; more on this later.
- It does not take into account how wealthy the investor is and with what risk levels he or she is comfortable. Wealthier investors are often prepared to invest a larger portion of their wealth into more risky but also more rewarding investments than less-wealth investors.
- It forgoes on the idea that younger people have not only more time to make up earlier losses but have also have more time to lose even more than older people since they have more time till the standard retirement age.
- It does not take into account that in case of death of the owner of the assets, it could be, from a tax point of view, more favourable to inherit ate stock holdings than cash.
In summary, this much quoted rule of thumb is a very simplified model that could be plainly wrong for a lot of people.
On the internet, you can also easily find automated asset allocation advisors like this one on the CNN Money website. Based on your inputs regarding time horizon, risk tolerance and flexibility, it provides you with a suggested assets allocation over bonds, small cap stocks, large cap stocks and foreign stocks.
A good aspect of the availability of tools like this is that it may prevent people who have no better information to put all their savings in just one asset. Following now such a model, they in any case diversify their investments. But this does not mean that they are only taking risks that they are comfortable with. The problem is that they maybe do not know or understand what risks they are taking.
The issue for me with following an advice like this would be that it is very much a black-box tool. You know what you put in and see what you get out of it, but you do not get an understanding how the tool came to the results. For me to sleep well at night, I want to understand why I would invest in a certain way. Just following the advice of a web application won’t do it for me since it does not provide me clarity on what type of assumptions are behind the advice that I am getting and if those assumptions are even valid for me.
When we want to answer questions like “in what assets to invest” or “how much of our savings to invest”, we consider at Stock Trend Investing the following aspects:
- Two different types of “risk”
- Your risk tolerance
- Inflation and Interest Rate
- Bonds, Options and other Assets
- Your presence in the market
Do you want to consider these aspects as well?
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 today teak plantations can be found in various tropical climates such as Central and South America, Asia and Africa. Teak investments in a plantation are said to be one of the most attractive investment opportunities in the long term, avoiding deforestation of natural prime forest and producing investor returns in excess of 10% and thus are claimed to beat the stockmarket.
When looking at concrete available teak investment opportunities, the individual investor is faced with a jungle of different providers and ‘Best Buy’ options. Doing a proper comparative analysis is difficult, requires too much time and also there is a lack of data making it very hard to actually understand and evaluate the available options. For the non-expert it is nearly impossible to compare the various teak investment offerings and shortly the investor is lost and faced with the only option to trust in whatever he was told.
IRR
Most teak investments highlight the return potential 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 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 few assumptions already define most of the cash flows:
- Price 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 cases historic data is being used for justification purposes. Just to mention, supply and demand dynamics in the future might be very different from the past while a base selling price should correspond to a realistic achievable price currently observed in the target market.
To estimate expected timber volume, the tree diameter is of especial relevance when buying into an existing plantation. However, even if the diameter appears superb, the trees should be straight and should have enough space to grow to maximize the commercial value.
The thinning schedule defines when commercial thinnings are made to take out the bad trees and leave more space for the good ones to grow further (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, since the investment horizon is shorter.
Changing one or two key assumptions in such a model results in significantly different cash flows and IRRs. Thus, more important than looking solely at the outcome (IRR) it is crucial to review the underlying assumptions and potential risks of the investment proposal.
Since all those assumptions are subjective, they can be used to ‘push’ IRR up, showing a more optimistic picture to attract investors than in reality. Thus its important to check that the assumptions are consistent with observations in reality. Without having a proper comparative basis, it will be very difficult for the single investor to challenge and put those assumptions into a context. Teak investments are long term in nature thus require strict discipline in cash management. Compounding effects of incorrect assumptions could have a devastating effect for investors: the company runs short of cash, requires more funding and existing investors could get diluted. Thus from an investor point of view, it is more important to be comfortable with the assumptions rather than the IRR.
Risks
Teak investments have various risks starting with improper site and location analysis, fires can especially damage younger trees while older trees are more resistant to such. Those risks are especially relevant for Greenfield projects after the first years since planting the trees. Passing the first years leads to bigger trees, thus the need for maintenance work reduces and the results are clearly more visible. Thus entering a plantation at a more mature stage should actually show a lower risk when the first years have already passed.
From an investor point of view, as relevant as the technical risks, are the risks of the investment itself:
- Quality of the plantation manager
- Asset being illiquid
- Overpaying at time of acquisition
- Underfunding of the investment
- Legal risks
It is important to obtain confidence that the plantation manager has the capability to undertake the maintenance properly in order to maximize the commercial value of the trees. What helps best here is to look at reference projects and actually check that the underwood has been cut and the branches are pruned.
Private teak investments are illiquid in nature and thus the investor needs to be prepared to be invested during the whole time of the project. One way to mitigate this risk is to be invested at a project involved in plantations of various maturities, thus expecting ongoing cash flows rather than be exposed to one final harvest year. The other option is to sell the investment before harvest, e.g. in year 10, which in theory is attractive to a new investor (shorter investment horizon) but in practice is difficult since the market is intransparent and it is difficult to find a buyer. However, contacting an independent broker such as Investing Alternatively might be advisable.
Price Per Hectare
Price Per Hectare bases on effective costs to be paid for an investment, thus is less affected through a subjective bias than IRR. Teak plantations have similar activities – growing trees – and the cost structure is pretty similar. Thus, Price Per Hectare is an ideal quick ratio to compare investment options across the industry. From an economic point of view, Price Per Hectare should be low when entering an investment. However, Price Per Hectare should always be considered in the context of a risk analysis. There might be valid reasons why it is worthwhile to pay a higher Price Per Hectare if it helps to reduce risk:
- Sustainability certifications such as FSC should allow to sell the timber to more buyers than non-certified timber, thus reducing risk
- Value additions such as a mill can allow to capture more value along the value chain
- Quality of the plantation manager since it affects the risk of improperly maintaining the plantations
Factors like these influence the risk / return equation, thus providing arguments to pay higher price per hectare than a similar opportunity which shows less premium arguments, thus has higher risk.
Conclusion
Some folks in the industry might tell you that financial forecasts are just numbers which all base on estimations and have not much to do with the reality which is growing a tree. From an investor point of view they are wrong. Visiting a plantation and seeing it in good condition is not enough to complete a Due Diligence. You should only invest if the expected return outweighs your risk. Thus this requires an in-depth look at the financial forecast, the entry price, the risks and how the investment relates to other investment proposals.
Etegameno presents lucrative investment opportunities in Namibia
Etegameno presents lucrative investment opportunities in Namibia
Etegameno Investments offers three lucrative investment opportunities in Namibia that are expected to yield high returns. Harnessing Namibia’s rich natural resources, Etegameno presents an investment model that turns these abundant resources into wealth, mutually benefiting investors and the natives.
Ranked as number two by The World Travel and Tourism Council, Namibia has the distinction for experiencing the maximum long-term growth in the tourism economy after China. This will positively influence the Namibian Gross Domestic Product in the coming years. The Namibian people will also enjoy increased employment opportunities through growth in tourism.
The three investment opportunities available on Farm Tsumore are:
• The Farm Tsumore Game Lodge
• A Bush to Electricity Enterprise
• The Jatropha Plantation / Biodiesel Refinery
The Farm Tsumore Game Lodge
Farm Tsumore is spread over 4 433 hectares of flatland and hills around the beautiful Lake Otjikoto. Conveniently located just seven kilometers from Tsumeb and 118 kilometers north-east of the Etosha pan, Farm Tsumore has plenty of water and receives its power from NamPower.
The location of the proposed Tsumore Game Lodge is gifted with picturesque natural beauty, abundant game and wild life and rich biodiversity making it a much sought after ecotourism destination for nature lovers.
Attractions include the Etosha National Park, historic local mining towns, safaris, scuba-diving tours, the world’s largest meteorite, Hoba, camping, hiking, and much more. A luxurious African safari lifestyle in a serene yet exciting setting awaits investors!
Jatropha Biodiesel
The oil-rich Jatropha plant grows on Farm Tsumore. Etegameno plans to leverage the Jatropha plant as a precious source of biodiesel, reducing the carbon footprint. Compared to fossil fuels, the processing of the Jatropha plant for biodiesel is much more cost-efficient and releases only one fifth the emissions. The processing of Jatropha oil results in valuable by-products that include latex, fertilizer and feed for livestock.
On a global scale, Jatropha biodiesel will have a major impact as there will be a huge demand for environmentally friendly fuel because of the increasing threat of global warming. The cost of Jatropha biodiesel is around US per 200L barrel. With the production of Jatropha biodiesel, Etegameno will ensure that Namibia’s expenditure on oil imports is drastically reduced. For investors, money invested in the cultivation of Jatropha plants and commercial production of Jatropha biodiesel means extremely profitable returns. The demand for fuel alternatives will always be on the rise and with fossil fuels depleting at an alarming rate, the production of Jatropha biodiesel will help in a big way. Find out more about this investment opportunity.
Bush-to-Electricity
The bush-to-electricity investment opportunity is an innovative investment opportunity for the investor’s portfolio in the form of high returns. The invader bush on Farm Tsumore and surrounding farms, which was viewed as a problem for farmers and livestock is now a lucrative investment option. More than ten million hectares of bush will be converted into an economical electricity generating project that will benefit the natives by generating employment and steady income. The electricity produced will power the area on a long-term basis.
Namibia, among other South African Development Countries, is presently experiencing an electricity shortage that can be fulfilled by renewable energy technologies such as wood gasification. In the bush-to-electricity process, the wood for electric plants will come from the bush. The land thus reclaimed will be used to increase the production of livestock, farming, cultivating Jatropha crops, pasture for livestock and much more. Read more about the bush-to-electricity investment opportunity.
How investors can profit from Farm Tsumore
Investors have the option of investing in one or all three of Farm Tsumore’s investment opportunities and enjoy lucrative returns on investments from the high profit margins. Investors also gain a 40% ownership in the new company with controlling interests and future enhanced shareholding options. Farm Tsumore gives investors a chance to be part of Namibia’s national growth.
Etegameno Investments will manage the entire project from concept to completion and this includes preparing contracts, land leasing, new company registration, liaison with local authorities etc. As a joint venture partner with the new Namibian company, Etegameno will also oversee the day to day operations of the business. Etegameno invites investors to benefit from Farm Tsumore, contact us for more information.
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