Investment Articles

As Investors and Financial planners continue to reduce their exposure to money-market investments in order to reduce portfolio volatility and capital risk, at the same time low interest rates are driving appetite for alternatives investments capable of replacing lost risk-free income. In fact, for UK Investors, the best 3-year savings account yields just 4% per annum (2.4% after 40% tax), and with CPI inflation reducing the value of capital by 3.5% every year, cash held in deposit accounts will continue to lose value in real terms, hence the desire for high income alternatives.

Strategic property investments offer an interesting play for the Investor capable of tolerating the relative illiquidity associated with real estate assets, and many markets around the world offer a glut of opportunities as distressed sellers seek to rid their balance sheets of property assets in exchange for liquid capital. There is however a number of inherent risks associated with property investing, and direct investments often involve taking on the potential liabilities involved with tenant sourcing and management, annual taxes and property maintenance. One alternative to the buy and hold property strategy is to locate opportunities where property assets can be acquired well below open market value and sold on to end-users within a very short timescales, often as quickly as 2 weeks. This allows the Investor to capture the discount as a liquid capital gain, and removes the risks associated with holding property assets for extended periods of time.

Whilst technically generating a capital gain, this strategy of ‘flipping’ investment properties displays a very similar investment profile to that of traditional investments for income where properties are held for longer periods of time in order to collect rentals. The main difference is that annual gains are much higher, and Investors can roll over their profits into further properties, effectively compounding returns every month.

There are a number of real estate markets around the world where this process of strategic identification, asset improvement and short term disposal is possible, and investors should look for opportunities to buy at a substantial discount where end-users are able to secure reasonable mortgage deals in order to facilitate the investment exit. Any market where mortgage finance is underwritten or guaranteed by the State such as in Brazil’s Social Housing Scheme allows Investors to acquire pre-construction properties – effectively financing the build – which are ultimately sold to locals under the scheme on completion.

The US property market is another obvious example, as banks and other financial institutions seek to exchange foreclosed properties for cash, and those Investors capable of selecting suitable assets, refurbishing to a ‘mortgageable’ standard and sourcing buyers to facilitate the exit are in some cases able to double their capital on a monthly basis as the discounts often exceed 50% to appraised value.

As always, Investors should source a Partner with a track record of identifying and delivering successful opportunities, and where sufficient due diligence is available for independent third parties in order to properly assess the timely veracity of any marketing materials, and where the track record of all counterparties can be established and verified.

David Garner is Managing Partner at boutique Alternative Investments and real estate investment consultancy DGC Asset Management.

Income investing is a widely used strategy; indeed most investment portfolios – large and small – will hold at least some income investments. Historically, Investors and Financial Planners have relied almost exclusively on financial markets to access regular income streams; either through share dividends, cash held in high-interest deposit accounts, bonds of varying types or other nice income generators such as Permanent Income Bearing Shares (PIBS).

Today we find that more and more Investors and Advisors are seeking out alternatives to money-market investments as volatility, economic uncertainty and dismal interest rates converge to limit the income producing potential of traditional financial instruments. Many in fact are refocusing on that old favourite; property. Since records began property has been used as an alternative investment asset to generate income and cash in on capital gains driven by rising demand for good quality properties from an expanding global and local population.

The basic buy to let formula employed by so many Investors relies on the availability of mortgage finance to fund acquisitions, whilst rental payments from tenants cover the servicing of the debt and hopefully extra income on top. Over time the debt is repaid (or then property rises in value) and capital gains are cashed in when the property is sold. Many Investors however plan to keep hold of their debt free investment properties and simply live off the rental income.

In today’s market, there are some tremendous deals on investment properties in various global regions, as distressed sellers offer assets at a discount to market value to encourage a quick sale. This present a further opportunity for Investors as the discount ultimately counts as a profit when the property is refinanced or sold. Indeed, the savviest of Investors seek out regions where assets can be acquired with very deep discounts and sell the properties very quickly on the open markets in order to simply take the purchase discount as a liquid capital gain. This strategic approach to property investing works just like other income investments, in that properties can be acquired and resold in very short periods of time, and the original capital and profit rolled over into more acquisitions providing a consistent stream of capital gains, but often I much greater quantity then for the Investor who chose to buy and hold a single property.

Post sub-prime mortgage crisis and resultant financial collapse, there are a number of property markets where Investors can access their choice of investment properties very cheaply and where the ultimate buyers are able to find mortgages. This being the case, then this strategy can be put to work in a big way. Opportunities like this exist in a number of US States where banks are keen to rid their balance sheets of foreclosed properties, and are prepared to accept massive reductions against valuations, and where recapitalised Lender are starting to offer reasonable and sustainable home loans to low income families, often at rates as low as 3% fixed for 30 years. Another interesting opportunity is in Brazil, where the government provide guaranteed mortgages to low income families in order that they move out of dangerous favelas and into newly built, approved housing developments, in this case, Investors can provide the construction capital by purchasing a social housing unit pre-construction at a discount, and on completion the property is sold with a mortgage to a local buyer, and the Investor taking up to 20% profit over the course of just 12 months.

Whilst ample opportunities exist for cash-rich Investors to capitalise on current market conditions, it is vital to find a capable Partner with a track record of identifying and delivering such opportunities, and where it is possible to undertake or view sufficient due diligence as to be sure of the risks associated with investing in physical property assets.

David Garner is a Parter at DGC Asset Management, an Alternative Investments boutique specialising in productive natural resource properties and strategic property investments.

Investment Options

Access to property investments is well-established, with a range of direct investment opportunities and collective investments available for both retail and institutional Investors alike. In the first instance we should look to the range of property sub-sectors available for consideration, and further investigate both direct and collective access points for the sector in general.

The main property sub-sectors that may be available for smaller investors are:

Residential
Commercial
Student Accommodation
Care Homes
Hotels
Leisure / Tourism
Development
Agricultural
Forestry

Within each sub-sector lies a range of possible entry points for Investors; broadly categorised as either direct investments or collective investments. Collective investments being either regulated or unregulated fund arrangements, where Investors capital is pooled so as to acquire a basket of assets, or participate in a project with a large capital requirement. Direct investments on the other hand are simply straightforward acquisitions of property assets by the Investor. There are, for example, funds for residential, student accommodation commercial and most other sub-sectors, and likewise, there are options for Investors to directly acquire investment properties in each of these sectors via freehold or leasehold title.

Direct investments – Simply the acquisition of property assets by the Investor, direct property investments take many forms; from the acquisition of property for improvement and sale; through to acquisitions for leasing/rental to a tenant or operator. For the Investors with sufficient capital or finance, direct investments remove the majority of risks specific to collective investment schemes where Investors are reliant on the external management of a property portfolio. Direct investments do however carry asset-specific risks; property assets can incur significant financial liabilities including on-going maintenance, tax and round trip purchasing costs (the cost of buying and selling an asset).

Property investments, especially direct property investments, provide the Investor with a level of security that paper-based investments do not due simply to the fact that quality property assets retain capital value throughout the long-term, which in the case of well-chosen properties in good locations, is unlikely to fall and cause the Investor a capital loss. Provided the Investor is prepared and capable of tolerating the illiquidity associated with physical property assets, this asset class provides true diversification out of traditional financial assets such as stocks bonds and cash.

For the direct Investor, careful consideration should be given to the due diligence process during the asset identification and acquisition stage, as in most regions this will require specific professional input from legal practitioners, surveyors, valuation agents, and in the case of niche property investment projects with a specific strategy Investors must also consider the counterparty risk in that in many cases Investors might be reliant on the performance of a strategy manager to achieve the expected returns from investing in their strategy.

Collective investments – Property funds come in all shapes and sizes, and invariably involve a Fund Manager acquiring a basket of properties in line with the fund’s investment strategy, and managing those assets on behalf of Investors in the fund. There are funds, both regulated and unregulated, that invest in all of the major property sub-sectors. One can find opportunities to invest in residential real estate, student accommodation, care homes, commercial real estate, shopping centres and property developments. Some of these funds cater only to large Institutional Investors, whereas other offer lower entry levels for smaller Investors.

The structure of collective property investments varies from fund to fund. Some are highly regulated affairs, established and operated by major asset management groups, others are small, niche operations established to capitalise on current short term opportunities or niche sectors or markets. Collective funds may be listed on an exchange, allowing smaller Investors to trade in and out of the fund as and when they please. This removes the potential illiquidity associated with the property asset class, however this also detracts substantially form the returns generated from the underlying property assets as some capital is never invested in order to ensure that redemptions can be made from cash without liquidating part of the underlying portfolio.

Whether listed or unlisted, regulated or otherwise, collective investments in property assets offer access to the asset class for the smaller Investors, although in many cases the cash flow dynamics of securitised investments differ greatly from direct investments in property assets.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in distressed real estate and productive natural resource properties.

Genuine alternatives to financial investments are considered to be ‘real’ or ‘hard-asset’ investments. Immoveable property such as real estate, farmland and timber properties are considered to be viable alternatives to financial assets, and moveable property like gold bullion, fine wine and rare stamps are also considered to be genuine alternative investment assets.

The case for real-asset investing is compelling; those with sufficient expertise in order to identify good quality assets in high demand can generate substantial financial gains as the inherent value of their assets grows over time. But in almost all cases, specific expertise is required in order to identify, properly value, and measure the risk associated with niche assets like timber properties or fine wine, and a lack of credible asset analysis, along with a non-existent regulatory framework have made this area of investing very high risk for most investors, many of whom have been subject to mis-selling, misrepresentation, poor advice or outright fraud.

Investors acquire certain assets as they are unlikely to depreciate over time, and when demand for the asset or its produce increases so too does the inherent value of the asset itself. So properties that are finite in supply yet have an essential function such as agricultural land, and forestry investment properties, are likely to see values rise as the global population grows and developing nations become wealthy and demand more resources. Niche sectors like fine wine also benefit from increasing demand for finite assets. As only a certain volume of a particular vintage is ever produced, the value increases over time as existing stock is consumed, and more buyers come into the market demanding the best quality product. The same could be said for other collectibles like stamps, antiques or rare coins. The basic underlying strategy remains relatively static across most in real-asset investing; acquire useful or desirable tangible assets, of which supplies are limited and demand for which is rising.

Core to the success of any property or asset-based acquisition for investment purposes is due diligence. Investors must be assured of the value they are receiving for the money they invest, and of the risks they face as an owner of such an asset. Often times such investment projects are structured so as to raise sufficient capital not just for an asset purchase, but also for its improvement and/or future operation or management, and in these cases it is paramount that an investor has ultimate confidence in the knowledge and ability of all of the counterparties which have an on-going responsibility to the good and proper management of the asset.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

During the past five years, the global economic meltdown has spurred a spate of reorganizations of the investment portfolios of major institutional investors, many of which are now allocating more capital to real-asset alternative investments in an effort to reduce exposure to volatile financial markets, generate superior investment returns, and underwrite the value of their portfolios with the capital value of niche, income-generating property assets including forestry investments and farmland investment properties that are unlikely to depreciate in the long term.

The logic is sensible, and the likes of Yale University Endowment and their Harvard counterparts have all entered into long-term farmland and forestry investments as part of an overall refocusing of their investment strategy. Historically, land, gold and gems of varying types have been the only store of wealth, it is only since the introduction of fiat currencies that investors have sought to build cash gains, rather than aiming to build a sizable portfolio of land, property or other physical assets. Now, many smaller investors are taking heed of the big boys’ new strategy, and investigating the potential benefits and risks associated with investing in commercial timber properties and agricultural land assets.

Both of these assets classes exhibit characteristics that hold particular appeal during times of economic turmoil. Not only have assets in both sectors outperformed the majority of traditional investment instruments, but also, investment returns are driven by factors and variables that bear little impact from turmoil and volatility in traditional equity markets. Trees continue to grow to valuable timber whatever the economic weather, and increasing demand for resources from China, India and other fast-growing emerging economic drives up the price of sustainably sourced commercial timber and demand outstrips supply.

Capital growth and revenue from farmland assets are also supported by increasing demand. More people simply require more food, and improving diets in emerging market economies require greater inputs of grains, water and other inputs including fertilizers and fuel. All these factors combine to drive up commodity prices (and farm income) on an annual basis, and a lack of suitable land in the face of growing demand also supports long terms capital values.

So, on paper both farmland and forestry investment assets offer a number of advantages to the investors, but there are also a number of asset specific risks that must be acknowledged and understood before venturing into this type of asset as part of a diversified portfolio. Here are some of the headline risks associated with agricultural property investing:

Sectoral Risks

Both farmland and forestry investments display risk-potential that is specific to owning and operating agricultural assets in general. Income is derived from the production and harvest of commodities, be it timber, biomass, energy crops, grains or livestock. Revenues streams can be volatile, with growers subject to prevailing market conditions at the time of harvest. A dip in prices may cause an entire years’ revenue to be wiped out. Energy prices also factor in, especially in relation to farmland. Higher oil and gas prices mean higher farm input prices, further squeezing profit margins.

In the case of forestry investments, value can be stored on the stump during periods of decreased timber demand (and deflated timber prices), as property owners simply leave their trees to grow larger and more valuable until market conditions dictate a sensible time to harvest and sell. There are of course a number of other risk-factors associated with investing in real assets in the agricultural sector, but the major sectoral considerations are volatility and immediate demand for produce.

Location Risks

It is written, and I personally believe, that the vast majority of demand for resources such as energy, timber, food and other commodities will come from fast-growing emerging market economies. China alone exhibits economic growth on such a scale as to dwarf that of developed economies. When 3 billion people drive a car, live in a timber and concrete house, and eat a western diet, then demand for energy and raw materials will reach a level hitherto unseen.

It stands to reason then, that agricultural assets located in regions close enough to, or even inside emerging market economies are best-positioned to participate in the supply chain, and offer enhanced returns for investors due to low asset prices and high demand for end products. Whilst emerging markets offer the best opportunity for superior investment returns, these locations also carry risks not associated with developed nations. The potential for expropriation of land and property by unfriendly governments attempting to win votes poses a very real risk, and investor should carefully investigate the security of title for international investors before committing funds.

Asset Specific Risks

This is where experience and expertise comes in. farms and forests are niche assets and require careful expert management in order to mitigate risk and maximize upside potential. Flood, drought, disease, pests and soil degradation may all affect the income potential (and therefore capital value) of agricultural property assets. Growing commercial timber takes skill, knowledge and experience, and running a successful farm requires the same. My advice? Only ever choose to invest in agriculturally productive properties if you are able to access and retain expert operational partners capable of managing specific assets in the region you wish to invest.

In summary, it could be said that investing in farmland, or timberlands, offers the investor the opportunity to generate non-correlated returns without dramatically altering the overall risk profile of a portfolio. But there are risks, and the risks to be considered are not necessarily the kind of risks that investors are used to acknowledging or assessing. So seek the advice of an experienced consultant with a track record of delivering successful projects, and make sure that you are capable of withstanding long-term illiquidity, as both farmland and forestry investment assets are long-term investments, and investors must consider that they will ride out the bad times along with the good, in the hope to retaining control of some of the world’s most essential, productive assets.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

There are a number of reasons that seasoned investors chose to invest in alternative assets; mainly of course to diversify in to assets where investment performance is not driven by the performance of financial markets in general; but also in order to capture capital gains and income to replace ailing and volatile equities.

The appeal of real assets like farmland, timberlands, real estate and other, more esoteric assets like fine wine and collectibles, lies in the fact that these assets are all tangible properties, that are likely to retain the majority of their value, and continue to generate income, regardless of whether stock are up or down. The general consensus is that an investment portfolio consisting entirely of stock, bonds and cash is grossly over-exposed to the day to day vagaries of ‘the markets’.

Choosing a good stock has become less about the basic underlying fundamentals of the company, and more about market sentiment related to the sector or markets as a whole, and it is this investing environment that pushes investors to seek returns elsewhere, whilst underwriting the value of a portion of their portfolio with capital assets like land or property.

Another good reason that interest in investment alternatives seems to be peaking, is the poor annuity rates offered to new pensioners by insurance companies. In every case, new pensioners are being forced to fix their incomes at a much lower rate than they had previously been able to do, causing many to readdress their future lifestyle choices and standard of living. This alone is motivation enough to seek out assets that retain their value whilst also generating an income to beat that of their deflated pension plans.

Pension Funds, University Endowments and Insurance Companies are mostly increasing their exposure to real asset alternative investments, with many making large purchases of farmland and forestry investment properties, and now Financial Advisors seem to be coming on board too, searching for secure and transparent alternatives for their Clients.

Making the most out of an investment portfolio is not just about picking the best stocks, but about investing in a range of assets to ensure that a blip in the market does not completely destroy the intrinsic value at a time when the investor may not have sufficient time on order to recover their losses before retirement. But investors should remain aware the real assets carry sector, asset, location and counterparty risk, and these risks must be properly acknowledged and understood in order that the investor does not expose themselves to risky assets that might be badly managed, which ultimately defeats the whole object of alternative investments diversification.

Investor and Financial Advisors are encouraged to seek the assistance of a professional Advisor with experience of identifying, measuring and delivering alternative investment projects, and who should be happy to provide references from happy Clients, and proof of their successful track record.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

Share farming involves the investment in certain defined agricultural sections by a group of like minded investors. Quite simply, it is the shared ownership of farmland. In New Zealand, where the farming industry forms such a large portion of domestic output, this can be both a secure and potentially rewarding way of expanding your investment portfolio.

Many share farming success stories are made possible through the dedicated work of agricultural investment groups. If there is one central point that all potential investors should know about share farming it is that getting this outside assistance makes the whole process far easier to manage and see measurable returns on. These investment groups work by first identifying farmland with the potential for long term financial growth. This creates a network of investment options for clients to mull over, safe in the knowledge that they are working with the best available land on the market according to all reasonable projections.

The ongoing success of share farming is often dependent on the quality of the equity manager or managers in charge of maintaining day to day productivity. Where investment groups again work well is that the best of them tend to match up investment properties with the most suitable managers. By putting stock in the selection process for identifying top equity managers, these investment groups are ideally trying to hone in on a set of best practices that will serve them well long into the future. Examples of concepts that share farming groups often embrace are not only financial viability, but also a consistent sustainability. This helps to foster an environment that is both forward thinking yet devoid of unnecessary risk.

In terms of what areas are most attractive to investors, there has been a long standing relationship between share farming and the Canterbury region. The physical environment is suitable for the sort of efficient farming that more often than not will reliably meet shareholder’s targets. Additionally, the region has traditionally attracted the sort of quality equity managers who know how to maximise the return on investment.

When looking at share farming options, keep an eye out for undervalued farms which are not living up to their potential. These are the properties that tend to be cheaper to invest in and have a higher ceiling for growth. Another tip that has worked for prudent investors in the past is using the leverage gained from property already owned and redirected capital gains into expanding upon current investments and acquiring new ones along the way. If you feel as though you could use a helping hand in getting to know the share farming process, then talking to an investment group will definitely be your best course of action.

Waibury Farms has a philosophy of creating modern well spec’d dairy farms for share farming. Find out more online today.

Purchasing an investment property is a big decision and one you have undoubtedly made with a view of benefiting from this purchase at a later date. Your decision to be a landlord for a rental property should not be a short term investment. There are costs associated with the purchase and sale of properties and to make it worthwhile, you will need to hold on to your investment long enough to cover the costs and make a healthy gain when you eventually sell.

The idea behind the purchase of an investment property is that the property will be rented out which helps with the ability to finance the investment and that during this time, the property will appreciate resulting in a profit when the time comes to sell.

Australia provides taxpayers with the opportunity to benefit from negative gearing aspects associated with investment properties which can assist in the decision to being a landlord in the rental market a worthwhile option and exciting venture.

To have a positive experience in owning investment property ensure that you seek expert advice from professionals who have your best interest in mind. This advice will ensure that you are aware of the various costs associated with rental properties, the best tax saving tips, the property which will offer a good return and the options for various loan structures.

There will be various tax considerations to be aware of such as what will be deductible and what will be treated as a capital expense and the various treatments of both. Depreciation matters and Capital Gains/Losses will also be of importance, therefore, it is imperative to place your taxation matters in the hands of a good tax accountant experienced in investment properties.

Without the good advice of these experts, your investment could be a costly exercise which take a considerable time to recover from.

Pat and Trish decide to purchase an investment property. The house they live in has a good amount of equity so they will be able to purchase an investment property and use the equity in their home as the deposit. They fall in love with an old home with lots of character in a suburb nearby. They decide to take out a loan of $367,500 for the purchase ($350,000) and fees ($17,500). The loan they applied for had the option to fix the interest rate for 5 years which they opted for as a safe guard against any rise in interest rates.

The property is rented almost immediately for $350 a week so they are off to a good start. Two months down the track they receive a call from the tenants complaining about leaks in the roof and gutters. After obtaining some quotes to repair the damaged roof and gutters they realise they do not have the $23000 required to pay for the repairs so they go back to the bank and obtain another loan to cover the costs. They had only just managed to be able to have the additional funds approved as their serviceability based on their income only just scraped in.

Three months go by and the tenants approach Pat and Trish again to advise them that the property is having major drainage problems. When the problem is inspected, it seems the roots of a tree has broken the sewerage pipes. The quote to repair the pipes was huge at $17,000 and Pat and Trish could not obtain anymore finance from the bank. They decide that the only choice they have is to sell the property.

The tenants move out. 4 months go by and Pat and Trish eventually sell the property. Due to the drainage issue it took longer to sell than normal and they ended up having to sell the property for $10,000 less than they they purchased. On top of that, they had to promise to fund the costs of repairing the sewerage pipes within 2 months. The costs associated with commissions to the real estate on the sale added another $10,200 to their loss.

When they approached the bank to advise of the sale and obtain the payout figure of their loan, they were reminded of the early repayment fees they will incur due to the loan being paid out while still in a fixed term period. Pat and Trish were shocked as they had no idea that this would come to the amount of $24,000. The repayment fees were stipulated in the contract, and the mortgage broker providing the loan advice did make mention of fees in connection to early repayment but Pat and Trish did not realise how high the fees would be. They had also heard that exit fees had been abolished and presumed that cancelled out any fees associated with the early repayment of the loan. They soon found out that early repayment fees were not classed as exit fees.

Pat and Trish had no choice but to suffer the loss associated with the investment property. The costs incurred with the purchase and sale, the holding costs of insurance, rates and interest, the repairs and the early repayment fees, Pat and Trish made a loss of over $100,000 in less than one year and were still left with a part of the investment loan to repay. The loss was more than what Pat and Trish made from their employment in a year and it would take them a long time to recover from this.

Thankfully, Pat and Trish were able to make some tax savings due to the negative gearing impact in their tax return. Because their costs outweighed their rental income by a substantial amount, they were able to offset it against their employment income and save thousand of dollars in tax. Although in this case the negative gearing eased the impact of the losses, the amount of money which Pat and Trish spent which resulted in the tax savings are far from a positive outcome.

The early repayment fees and the cost of repairing the drainage, were not deductible as an expense in their tax return, however, they formed part of the cost base when calculating the capital loss of the investment property on the sale. They will not be able to offset that loss until such time as they make a gain on another investment property should they choose to invest again. They are also still repaying part of the loan for a property they no longer hold.

Purchasing an investment property is a positive way to create wealth and can be done very successfully with the right advice. Many investors have made their fortune buying rental properties which in many cases even earn them a healthy income. It is an excellent means of saving as it provides an avenue for those with extra funds a way to make the money work for them. There are many success stories and it is not unusual for someone who has purchased an investment property to sell the property 7 years later and make a gain of $400,000. Not a bad earning when you consider the amount of years you would need to work to generate that amount of wealth.

Investment properties are still considered to be a positive option in Australia. Currently there are opportunities available for investors to purchase properties with a $10,000+ rebate from the Government annually for 10 years which results in it being cash flow positive. This means the purchaser can buy rentals which may end up not costing them anything at all. In fact, at the end of the year after all costs are realised, there can be a nice profit to be celebrated.

Good opportunities are available, however, expert advice from a professional is the first and best investment to make in ensuring wealth creation is a lucrative event.

Marian Trinick is a Public Accountant, Tax Agent and Mortgage Broker. Marian owns a business in Coogee Western Australia offering a multitude of services to individuals, sole traders, partnerships, trusts, companies and investors. Her Mortgage Broking experience extends to personal, motor vehicles, properties, leases, equipment finance, smsf and business. Marian has a wealth of experience and expertise in the property investment market and can provide the advice on the optimum tax savings and the best loan to suit your situation. Find out where Marian is: http://www.cockburnfinancialservices.com Call Marian now to find out how you may be able to invest in property and be cashflow positive at year end resulting in you not paying a cent for the investment. Also, ask Marian how you can borrow the funds to invest using the equity in your current property as the deposit. Refinance now and see how much you could save! 08 9434 2371 or 0412 266 597. ACL: 395605

Investors looking to diversify their portfolios and insure their wealth against the ravages of volatility in traditional markets, will most likely have come across a range forestry investments, promising to generate superior inflation-adjusted and risk-adjusted returns for the long-term investor.

But how have timber investments performed? And how does the smaller investor participate in this interesting alternative investment asset class?

Firstly let’s look at the past performance of forestry investments, as measured by one of the main timber investment indices, the NCREIF Timberland Index; according to this basic measure of investment returns in the sector, this asset class outperformed the S&P500 by some 37 per cent in the 20 years between 1987 and 2007. When stocks delivered average annual returns of 11.5 per cent, forestry investments returned 15.8 per cent.

At the same time, returns from investing in timberland and woodlands have been proven to display a much lower volatility, an attractive characteristic for today’s investor.

Previously, the majority of investment returns from forestry investments have been mopped up by larger, institutional investors such as pension funds, insurance companies and university endowments, who have collectively placed over $40 billion into timber investments in the past decade.

So on to the second question; how do smaller investors participate in this kind of alternative investment?

According to a study by Professor John Caulfield of the University of Georgia, returns from forestry investments are three-fold;

An increase in timber volume (biological growth of trees), which accounts for some 61 per cent of return on investment.
Land price appreciation, accounting for only 6 per cent of future returns.
Increase in timber prices per unit, delivering the final 33 per cent of investment returns for timber land owners.

So the best way to harness the performance of timber investments is to take ownership of trees, either directly, or through one of the array of forestry investment funds or other structures.

Timber REITs

One way for smaller investor to participate in timber investments is through a Real Estate Investment Trust (REIT). These investment structures are like funds, in that investors can buy and sell shares in the trust on an exchange, the REIT acquires and manages timber investment properties, but unlike normal companies must pay out 90 per cent of their earnings to investors through dividends.

Some examples of Timber REITs are:

Plum Creek Timber is the largest private owner of timberland in the U.S. and the largest timber REIT with a market cap of about $5.6 billion, many investors have chosen this as their route into forestry investments.

Potlatch is also a timber investment REIT while

Rayonier generates about a 30 per cent of its REIT earnings from timber.

Weyerhaeuser has disposed of its paper and packaging businesses and will convert to a REIT by year end.

The Wells Timberland REIT is not publicly listed but may be available for purchase through Wells Real Estate Funds.

Another way for smaller investors to add forestry investments to their portfolios is to buy Exchange Traded Funds that attempt to track the performance of timber returns. This is less direct than owing timberland, or investing in a timber REIT, as the ETF may also invest in shares in companies involved in the timber supply chain including processors and distributors. This means that investing in forestry through ETFs exposes the investor to some of the volatility of equity markets.

The Guggenheim Timber ETF owns about 25 stocks and REITs involved in the global timber and paper products industry with a 30% weighting to U.S. companies.

The S&P Global Timber & Forestry Index Fund holds 23 securities and is 47 per cent invested in the U.S.

Timber Investment Management Organisations (TIMO)

Those with more capital to spare can participate in forestry investments through TIMOs, although the majority of these investment specialists require a minimum investment of $1 million to $5 million and a commitment to tie up funds for up to 15 years. TIMOs essentially trade timber land assets, acquiring suitable properties, managing them to maximise returns for investors, the disposing of them and distributing profits to shareholders.

Many experts believe that the active management style of TIMOs ensures that they can be more reactive to market conditions than REITs, and therefore don’t tend to fall and rise in line with the market quite as much.

Direct Forestry Investments

Those with access to sufficient capital and the appropriate expert advice can invest in physical properties. Commercial timber plantations are complex operations that require skill, knowledge and expertise to manage effectively and maximise returns whilst lowering risk.

For armchair investors, or those with less capital to spare, many companies offer investors the opportunity to purchase or lease a small portion or plot within a larger, professionally managed timber plantation. Investors normally take ownership of their plot and trees via leasehold, whilst the timber investment company plants, manages and often harvest the trees on behalf of the investor.

Options for investors range from species to species and region to region, with current opportunities in Brazil, Panama, Costa Rica, Germany, Nicaragua and other, more exotic locations like Fiji.

Investors should be wary as many of these direct forestry investments are frontloaded with enormous commissions for salesmen and promoters, with many offering ‘agents’ up to 30 per cent commission for the sale of plots to investors, and in many cases, no due diligence even exits.

In some cases, the Author has seen forestry investment plots in Brazil packaged and sold to investors for over £100,000 per hectare. Investor should seek advice from an independent consultant with experience of this alternative investment asset class, and who is able to present a complete suite of due diligence material, including an independent valuation of the forestry investment property on offer.

Summary

Investors choose forestry investments due to their effect as an inflation hedge, and their ability to generate non-correlated return on investment in the long-term.

Performance of the asset class is driven by demand for timber, weighed against global supplies, and in the long-term we are using timber at a faster pace than we can grow it, making timber investments an attractive asset class for the investor seeking stable, long-term capital appreciation within their investment portfolio.

Investors looking into which type of forestry investment is right for them should consult an adviser that can demonstrate experience and expertise within the sector.

DGC Asset Management Limited is an alternative investments business, identifying opportunities to invest in non-correlated assets.

David Garner is Partner DGC Asset Management Limited.

I have found that after several years of helping people purchase and manage investment properties that many investors still invest with their emotions. When it comes to building an investment property there is only one way really invest, with a cool, unbiased and rational mind. Stay detached from the process, and look at it as simply an investment, nothing more.

Let me give you an example. I advised a client years ago who wanted to get started on the residential property market. He was living in a more affluent suburb, and had a very good job that saw him earning in the upper 10-20 per cent of the population.

He had heard that investing in property was an excellent way to build future wealth, and was a secure investment. I advised him that he should buy land in the fringe of the city, and then proceed to build a new house. I explained to him that there would be minimal maintenance costs in a new property, and a new house will attract the best possible depreciation, giving the owner an advantage tax wise.

I further explained that a property in a new outer suburb will have a good chance of tenancy on an almost continual basis. The lower rental cost in these areas (commensurate with the cost of the property) meant that low to middle-income bracket families would always be willing to rent.

Unfortunately the investor disagreed with me. He argued that buying a property in his suburb, at a cost of around 4 times the cost of the house and land I was showing him, would return a much greater rental return. He did not factor in the higher mortgage cost that would be involved, nor the fact that the rental return in the suburb was actually much lower than in the outer suburb.

Worst of all though, he figured that the higher priced rental would mean that he would attract a much better calibre of client, who would care for his property, and afford him lower maintenance costs. This was an incorrect assumption for two reasons; firstly just because someone earns more money or can afford a higher rent does not make them a better person, or more likely to take good care of your property, and secondly, the existing property was older, and due to normal wear and tear, would have many more maintenance issues.

The investor went on to buy the more expensive property, and actually had trouble renting it out (the higher end market is much smaller), and at this point is looking to sell the property at a loss.

My suggestion, if one has the money to spend, would be to invest in three or four smaller priced properties. This is a much smarter path to wealth creation, and, in general, will see you much more satisfied as an investor.

The advantages of buying land in an outer suburb and building a house on it are then:

- You are adding value to the land, thereby creating wealth by actual work

- You can take advantage of tax breaks available as depreciation

- Often better rental return on this end of the market

- New equipment and fittings usually means less money to be spent on maintenance

- High demand from a larger market allows for better rental return and higher tenancy

- Finally, the lower cost per investment property allows for a sounder investment strategy of three to four properties instead of one higher priced property

If you follow the advice I have given you here you will have handled that first step of investing with a rational mind, instead of based on your emotions. Don’t buy an investment property based on where you would want to live, or based on if you like the area. Invest based on the area that will give you the best rental return, and will cost you the least in maintenance.

If you would like some further advice on this please do not hesitate to me at Dynamic8 Property Investment.

Anthony Peluso Residential Property Investment Consultant http://www.dynamic8property.com.au