It is estimated that approximately 330 000Ha of new forestry plantations need to be established per annum in Africa to satisfy future demand. Unfortunately, the amount of actual new plantations does not come close to that figure.
According to Roger Naylor, senior consultant at Indufor, one of the world’s leading forest consulting service providers, only around 60 000Ha of new forest plantations are currently being established per year.
“This is all being established by the private forestry industry and not by state owned entities,” says Naylor.
Africa meets all the criteria for investment into the forestry sector. As an emerging market, the continent boasts with a birth rate and high population level, a developing middle class and a high urbanization rate.
In many instances, investors can benefit from the obvious first mover advantage of investing in an emerging market, where low upfront costs, like the low land prices in comparison to mature markets.
There are a number of advantages in investing in emerging, or even pioneer markets and it has proven popular the world over – especially for institutionalized investors like pension funds. While forestry investments typically make up only a small percentage of the total investments of these funds, it has been beneficial to them, yielding high returns and a nifty way of diversifying portfolios and spreading the risk.
According to Naylor, forestry investments in emerging markets have been gradually growing, but it remains small in comparison to investments in mature markets that typically provide lower risk, but at the cost of much lower return than emerging markets typically offer.
The pitfalls of investing in emerging markets are many. Any investment into an undeveloped market comes at high risk and thus the nature and extent of such risks need to be fully understood before jumping into the deep end.
Some of the difficulties include the fact that in an emerging market, one has to look toward the long term cash flow, as these investments are normally quite long term, with high initial costs of establishing the assets.
“Traditional private equity investments have been very successful in regions with large contiguous areas of land available, like in Brazil, Paraguay, and Colombia, but it is not necessarily right for Africa,” says Naylor.
“While Africa possesses all the characteristics of an ideal emerging market to invest in, including its growing need for wood and wood products, one would have to come up with a investment model, and perhaps new partners, to successfully invest in the forestry sector in Africa,” says Naylor.
“With traditional individual investors having returned to the safer investment geographies like the US, a window of opportunity has arisen to get in early and develop an asset pipeline for later commercial investors.
“The whole idea is to get an impact investor with a low investment return expectation and a high risk attitude to invest in the asset, and develop it. One can then later add an additional layer of investment, or funding through a development bank, for instance.
“Finally, once the asset has been developed and de-risked, and a proven strategy is in place, one can attract the attention of further commercial investors, who will love to invest in a well developed and de-risked asset.”
Click here to read more interesting articles on the 2017 DANA Forestry Investment Conference.