Thursday 28 Mar 2024
By
main news image

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 22 - 28, 2016.

 

Investments in forests have long provided lush returns for investors in developed markets. Now, those in Southeast Asia will have the chance to dip into this evergreen asset class. 

suraj_shelter-in-forests_chart_pw_1098_pg4

By Capital Hive was initially started to set up an interest scheme structure for agarwood (valuable wood from certain trees that have been infected with a type of mould). However, it had to revamp its business model following a backlash and the subsequent tightening of regulations after the Country Heights Grower Scheme (CHGS) folded in 2013. CHGS was Malaysia’s first oil palm farm-sharing scheme, providing subscribers the opportunity to participate in the country’s palm oil industry. However, six years after its launch, it was forced to wind things up after becoming unsustainable. 

Capital Hive was set up in 2012 and focused on real estate and forestry management in Malaysia, but now its operations are based overseas. “We are licensed in Labuan. Our holding company is out of Singapore and we are setting up a fund that will be domiciled in the Cayman Islands,” says Suraj.

The company will be registering the fund with the Monetary Authority of Singapore (MAS) once its prospectus is ready in the second quarter of this year. “The bulk of our fundraising will be in Singapore and any investor can buy through Singapore. Among the offshore jurisdictions, Caymans is the most respectable and most transparent; it adheres to all the laws and is compliant with money laundering regulations. Institutional money generally looks for a good jurisdiction. We will be one of the more than 20 funds listed on the Cayman Islands Stock Exchange for compliance listings,” he says.

Suraj’s team is made up of experts in a number of areas including corporate finance, investor relations, real estate and timber. “We are doing it a little differently, by setting very high compliance standards because it is a green fund. Compliance listing basically exposes the inner workings of the fund to anyone who wants to see them, so there are annual audits and full transparency. The whole objective is to make the fund institutional client compliant, so we can attract institutional money,” he says. 

Capital Hive director of corporate finance Dennis Cheek explains that its business model comprises plantations, processing and trading. In the initial stage, its fund will focus on fast-growing timber to cater to the demand for wood pellets. 

“We plant trees, and that in itself is quite a monumental task because in sustainable planting, there is a whole set of methodologies and protocols — outlined by the World Bank’s International Finance Corporation’s (IFC) environmental, social and governance (ESG) criteria — to follow,” he says.

“We have earmarked a few sizeable parcels of land in Kalimantan [30,000ha], Myanmar [20,000ha] and Cambodia [11,000ha]. All in, the total land mass we are looking at is almost as large as Singapore.

“It is an end-to-end business, so we plant the trees, we process them at a pellet mill and from there we have biomass pellets, which are traded in places such as Japan and South Korea, as well as China to a certain extent. 

“We are catering to people who want to replace fossil fuel in their power plants. For example Japan and South Korea have signed and ratified the Kyoto Protocol and more recently, the climate change accord in Paris. So, these countries have to replace 10% of their burning by 2020, which requires a significant amount of biomass.

“What this allows us to do is provide steady dividends to investors and because we are harvesting for wood pellets, the first harvest will be after the second or third year of planting. For a timber farm, we are generating income from the third year onwards. 

“We are the first in the world to do that. You can look at other timber farms, when they start from the ground up you are looking at a minimum of seven to nine years for the trees to mature. We have portions of the plantations reserved for longer growth because at seven years, the timber species we work with will have a high economic value. Seven years onwards, you are looking at larger returns because the timber can be used for plywood.”

Suraj says its timber material — similar to that of spruce and pine — is more pest and disease-resistant as it is developed through tissue culture. “It is more resilient and tends to grow a little faster as well because it is hardier. You select good material and you produce good material. It is not genetically modified, it is purely selective breeding and replication,” he points out, adding that most of the timber plantations will be mechanised to reduce reliance on labour. 

The use of wood pellets soared after Europe adopted carbon sequestration policies to cater for its energy needs, where woodchips used in power stations have to come from sustainably managed forests and the carbon released can be offset by the carbon that is captured and stored in newly planted trees. 

The predominant argument is that wood is carbon-neutral and when it was agreed that wood is renewable, its demand grew by leaps and bounds, particularly in Japan and South Korea, which have been scouting for pellet supply from countries such as Vietnam and Australia.

South Korea aims to import five million tonnes of pellets by 2020 to achieve its renewable energy targets. New Forests, in its five-year outlook, states that in 2014, South Korea emerged as the fastest growing market for wood pellets in the world, with imports reaching 1.85 million tonnes — the bulk of it from Southeast Asia — up from just 122,000 tonnes in 2012. 

While the report notes that the market has slumped and prices have dropped following criticism that the government’s renewable energy targets are too ambitious, demand is not likely to fall. 

Capital Hive’s target investors are those with portfolios dedicated to good industry practices such as the ESG standards. “The problem is there are not many such funds out there because the compliance or the guidelines are hard to follow. The sheer nature of what we are doing — we are not only taking timber, we are putting it back — so we comply very easily,” says Suraj.

The main disadvantage is that there are no returns in the first three years. “But after that, it is a relatively low-risk investment. There are no surprises, you are just watching trees grow,” says Cheek.

“The fund owns long leases on the land and the timber. Because of that, the risk is substantially reduced. You are working with an asset that is physical and tangible,” he adds.

“The valuation can’t go wrong. A lot of people, when they invest in funds, they always look at securities against complicated instruments and it is very hard to ascertain the value at times. Now, it is very easy. There are many models established by the Americans, Australians and Canadians on how to value timber,” says Suraj.

Initially, Capital Hive will be raising US$40 million, says Cheek. But it aims to manage US$80 million to US$100 million worth of assets by end-2016. 

Once the fund takes off, there are plans to get a retail cluster on board, says Suraj. The company is looking at a crowdfunding model to make the green investment available to more investors. “We believe that investments with good fundamentals should be made available to everyone,” he adds.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share