After writing about Forestry as a good alternative a couple of months ago, I wanted to focus in on one particular branch (pardon the pun) of forestry investment – Bamboo.
Why is Bamboo Different?
Forestry is a great investment that beats inflation, has a green halo and is supported by the worlds growing demand for timber. The problem is that by its very nature, forestry is just about the most illiquid investment you can make. Investors may see interim returns when plantations are thinned, but the real profit is once the fully mature trees are harvested – which can be 10 or 15 years after the initial investment.
Bamboo is different. Technically it’s not in fact a tree, it’s a grass. It can reach its full height in just one year and reach full maturity within four. In the right conditions, its growth can surge 100cm a day! And by using the correct harvesting techniques, growth of the plant is further stimulated, enabling bamboo to produce up to twenty times more timber per hectare then a single rotation of common plantation trees.
Basically, as it is very fast growing it can offer investors returns at a much earlier stage than other forestry investments.
Because it is so fast growing, bamboo sequestrates (absorbs) a lot of carbon – up to four times as much as conventional forestry plantations by some estimates. Carbon is one of the greenhouse gasses that contribute towards climate change so the more carbon we can absorb from the atmosphere, the better. Bamboo has other environmental benefits. It has a complex, dense and tough network of roots which provide exceptional soil stability. This makes it’s ideal for afforestation and reforestation projects where the soil has been weakened after being used for agriculture. It also means bamboo can be grown on poor quality land, so it is not replacing essential food crops. As a robust plant, it does not need lots of irrigation, fertilizer or pesticides.
As bamboo is now starting to replace hardwood in the construction industry – see below – bamboo offers the prospect of a sustainable building material that will help reduce large scale logging and help combat illegal logging.
As ever, the green, socially responsible halo is a great hook and something that genuinely interests a lot of clients who are keen to invest ethically – so as an agent you would be wise to have some green investments in your tool kit to help service this type of investor. The only downside is that there have been no major studies of bamboo as a carbon sink and so far no bamboo projects have been awarded carbon credits under the UN Clean Development Mechanism. So nobody has yet quantified just how much carbon a bamboo plantation would sequestrate.
Qualities of Bamboo
Bamboo has a higher tensile strength than steel and offers greater strength, resistance and thermal tolerance then other timber options. Despite these qualities, bamboo is also very light and therefore easier and cheaper to transport. However, bamboo is an awkward shape. The culms (poles) are long, thin, round and hollow. The timber that is used worldwide in construction needs to be in the form of big, flat planks. This is why bamboo has not been widely used before now. However, new processing techniques now mean that bamboo can be reconstituted and shaped just like traditional timber. So now bamboo is beginning to replace traditional timber for use in building construction and as flooring. These two sectors are really driving increased demand for bamboo and this is the real investment story here. As emerging markets grow, particularly in Brazil, India and China demand for timber for building materials will also grow, just as we’ve seen with other raw materials and commodities. At the same time as demand grows, supply will also tighten as action is taken to preserve forests and reduce illegal logging. As David Cox, director of Property Frontiers and promoter of EcoPLanet Bamboo points out:
“30% of current global timber supply is from illegal sources and another large percentage is unsustainable. We need to replace this with sustainable supply. As bamboo is a grass and not only survives but flourishes under harvest conditions, it really has the potential to do this. The big markets are flooring, fibre panel board, construction and furniture. The engineering performance of bamboo in these areas exceeds that of more traditional yet less sustainable timbers. Because of its fast pace of growth, it also has cost advantages.”
Other uses of Bamboo
It’s the exciting new prospect of bamboo as a construction material that is creating the current interest in the bamboo as an investment, but it does have some other interesting uses as veneer, clothing, medicine and cosmetics. These other uses can be nice hooks for clients as well and show that it is a very diverse, high quality material.
Bamboo as an Investment
What to look for
- Look for investment products that offer returns from very early stages – from year 3 at least. This is the key reason for investing in bamboo.
- Look for well managed projects with experienced management teams who have a track record. Don’t invest in guys who are just jumping on the forestry / bamboo bandwagon. Look for projects that can outline their management and harvesting plan
- Look for clear, verifiable evidence that the plantation can grow the volume of bamboo that is suggested in the investment prospectus. Independent reports are great evidence of this.
- Check that they are calculating the volumes and returns on offer based on conservative assumptions.
- Check that there is crop insurance of replacement guarantees in place – so if your crop is struck by disaster you are reimbursed or your tress are replaced from buffer stock and you do not lose out.
- Look for investments that are structured with low entry levels so they can appeal to a wider audience of your clients
- Ensure that there is regular reporting and updates to client on the progress of the plantation and their investment and that they can inspect the plantations if they wish to
- Check and be aware of any currency risk that investors are taking on
- Finally and most importantly, look for projects where the interests of the project managers and the investors are aligned. The project manager should not get all of their money up front; they should be dependent upon the success of the plantation as the investors are.
There are a number of projects out there at the moment looking for agents and if you can find one that meets these criteria you could add another strong product into your armoury.