How to understand Teak Investments

Teak Investments - An Intransparent Industry

Teak is a prime tropical hardwood and needs 20 to 25 years to grow in a commercial forestry plantation. The plant origins from Asia but at this time teak plantations can be identified in numerous tropical climates such as Central and South America, Asia and Africa. Teak investments in a plantation are stated to be 1 of the most attractive investment possibilities in the long term, avoiding deforestation of all-natural prime forest and creating investor returns in excess of 10% and therefore are claimed to beat the stockmarket.

When searching at concrete attainable teak investment opportunities, the individual investor is faced with a jungle of completely different providers and 'Best Buy' choices. Undertaking a correct comparative evaluation is tough, demands too considerably time and also there is a lack of information producing it particularly difficult to actually fully grasp and evaluate the out there alternatives. For the non-professional it is almost impossible to evaluate the numerous teak investment offerings and shortly the investor is lost and faced with the only alternative to trust in whatever he was told.


Most teak investments highlight the return possible of such investments and use the Internal Rate of Return (IRR) as best proxy (or from time to time also referred as the Return on Investment ROI). The IRR is a subjective forward-searching estimate, derived from expected money 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 currently define most of the cash flows:

- Value inflation estimate

- Base promoting cost assumption per m3 of teakwood

- Commercial timber volume of a tree (in m3)

- Thinning schedule

Inflation is tricky to estimate going forward and in some instances historic information is getting utilised for justification purposes. Just to mention, supply and demand dynamics in the future may well be incredibly unique from the past though a base promoting cost ought to correspond to a realistic achievable price at present observed in the target market place.

To estimate expected timber volume, the tree diameter is of especial relevance when obtaining into an current plantation. Nonetheless, even if the diameter appears excellent, the trees will need to be straight and should really have sufficient space to grow to maximize the commercial value.

The thinning schedule defines when commercial thinnings are created to take out the bad trees and leave a great deal more space for the great ones to develop additional (natural selection). In order to have a commercial value, the wood wants to have a certain age. For estimation purposes, setting the thinning schedule earlier on, positively impacts IRR, due to the fact the investment horizon is shorter.