The International Appraiser

The International Appraiser
Appraisal of a proposed solar farm at 10,000 feet above sea level - Pichincha, Ecuador

Sunday, August 7, 2011

Costa Rican Teak Farms for Gringo Investors

I’ve been preparing for an upcoming tree farm appraisal assignment in Costa Rica, but learned late that what was thought to be a teak farm is actually a tree farm with lesser tree species. Nevertheless, something should be said about the teak farm market in Costa Rica.

In the late 1980s Costa Rican President Oscar Arias declared a state of emergency concerning the depletion of the nation’s forests, much of which had been felled for timber harvesting or cattle ranching. Generous tax exemptions were put in place to encourage commercial reforestation projects. Capitalism quickly and enthusiastically addressed the problem, and some of those who observed the flow of international capital into Costa Rican forestry investments figured out that perhaps there was more money to be made by selling forestry investments than in actually growing, harvesting and processing the trees.

As with any market for investment properties, distortions are created when properties are developed in response to investor demand rather than consumer demand. For instance, great surpluses of “rental homes” were developed in Arizona, Las Vegas and Kissimmee, Florida, not in response to a shortage of housing in those areas, but to sell to out-of-state investors. Costa Rican tree farms are now repeating the same concept all over again.

Teak became the preferred tree farm crop because of its high value. There were no restrictions on the creation of new supply in Costa Rica, so many entrepreneurs got into the teak plantation business and European “investment funds” (syndications) were organized to develop teak plantations for small investors, charging high mark-ups. Many teak plantations were subdivided into smaller parcels for purchase by small, absentee investors in North America and Europe.

Misleading data crowding out objective data

The Costa Rican timber market is fragmented and lacking in price information, which has led to the crowding out of objective information by hyperbole crafted by investment promoters, many of who claim historical investment returns in the timber industry of greater than 13% per year. This is not based on Costa Rican data, however.

The most recent price survey among the Costa Rican members of OLAT (the Latin American Teak Organization) indicates prices between $120 and $595 per cubic meter for standing teak trees, depending upon diameter, but prices appear to have decreased since February of this year. For instance, standing teak trees of 50 to 59 centimeters in diameter were priced at an average of $220 per cubic meter then but are now priced at $175 per cubic meter, a drop of 20% in the last six months. Mature trees above 30 years in age have much greater value per cubic meter than immature (“short rotation”) trees, as they can be more efficiently processed into large pieces of sawn wood.

Investment promoters, however, are misleading investors with pro forma cash flow projections based on price increases of 5 to 10% per year, despite the increasing supply of Costa Rican teak, and unrealistically shortened maturity times of 20 to 25 years. OLAT’s data is based on reported prices for mature 30-to-50-year-old trees (the older, the more valuable) and describes 20 to 25-year old plantations as “young plantations” for which there is insufficient market price data, and also commenting that Latin America will supply an important part of the teak market, but is not properly geared to marketing short rotation material. This will change in the coming years, with the knowledge that producers are not getting the best price, the market being controlled by buyers.” In Asia, teak trees are often not harvested until 60 years.

As for the balance between teak supply and demand in Costa Rica, OLAT states “With all the money that was invested by forestry funds over the years in Latin America many plantations were enthusiastically created and the know-how has been improving steadily. Lacking, to some extent, are the sales aspects of plantation products.”

Investment Promoters and Scam Artists

Some investment promoters are not even selling land to investors, just the trees themselves. It is important to know that titled ownership in Costa Rica extends to real estate only; there are no tree titles, and the idea of tree titles in a nation with so many more trees than people would be an administrative nightmare, even if it was tried.  How does one prove ownership of trees that are situated on someone else’s land? Any contract in English is not valid or enforceable in Costa Rican courts, either.

Many investors claim to be victims of scams in which plantation owners sell tree ownership and then charge a fee to manage the tree investment; Tropical American Tree Farms seems to have attracted the most complaints. Most of the alleged fraudsters are gringos themselves, including Eric Heckler, who was a fugitive from mortgage fraud charges in Florida when found selling Costa Rican teak trees that weren't his before being extradited back to the U.S. in 2009.

In the numerous listings of teak plantations for sale in Costa Rica, a sizeable discount per tree is apparent for the larger plantations, indicating an insufficient demand for the quantities of teak they are producing, with prices as low as $167 per standing tree for 20-year-old trees, which translates to about $244 per cubic meter (based on an average of 0.8639 cubic meters per 20-year-old teak tree), or 58 cents per board-foot, quite a bit lower than even the OLAT-published prices.

Next stop: Tepotzotlan, Mexico
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14 comments:

Anonymous said...

I don't think these comments apply to Ethical Forestry a UK firm who own land and sellm investments in trees.

Vernon Martin, MSRE, CFE said...

Ethical Forestry is one of several UK forestry investment promoters to have a consumer complaint against it. Think about it this way: They already own the tree plantations, so if this is such a good investment, why are they selling?
Also, should you trust in an investment primarily sold through telemarketers?

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Anonymous said...

can anyone recommend a licensed surveyor for appraisal of teak trees/plantation... approx 700 trees approx 20 yrs old...? (evinais@yahoo.com) kevin aisner

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Anonymous said...

was going to invest with Living Investments uk who offer 20 year lease of 0.2 acres for £7400 with management fees extra. Their projections reckon £1060 per 20 year old tree based on £5/bft. Is this nonsense ? Thanks for your advice.

Vernon Martin, MSRE, CFE said...

£5/bft is an obvious projection based on inflation. £2/bft is the highest recent price I've seen for 20-year-old trees in Costa Rica. How old are the trees now? In any event, they must be assuming an appreciation in teak prices of at least 4.7% per year, and that's assuming that the trees are just being planted now. If the trees already exist, they are assuming an even-higher appreciation rate.

I'm not familiar with Living Investments. First of all, you need to establish that they own what they say they own. They should be able to provide an "escritura" that establishes ownership of the property in question. There are scammers out there who sell trees that they don't even own.

Vernon Martin, MSRE, CFE said...

For those who are asking, bft means board-foot. The conversion rate into cubic meters is 424 board-feet per cubic meter.

Anonymous said...

Is this math correct?
If a 15-20 year old tree is estimated to produce 0.5cu m timber. If there are 424bft in cu metre then there must be 212bft per tree. Now Living Investments are reckoning a harvest price of £5bft giving price per tree at £1060, this is for 0.5cu m. So price per cu m would be double this making £2120 or roughly $3200. This is over 10 times the figures I have seen and seems highly unlikely.

Vernon Martin, MSRE, CFE said...

I think you've answered your own question, Sir, and I marvel at the number of English companies marketing Costa Rican teak trees.

I believe the saturation of the teak farm market may be driving prices downwards, so do not count on projections of large price increases in the future.

When I was in Ecuador I saw 20-year-old teak farms listed for sale for as little as $100 per tree. Perhaps bargain-hunters should focus on Ecuador.

Dave Anderson said...
This comment has been removed by a blog administrator.
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