Forest investments

It's a Jungle Out There

cocoa
Cocoa is just one of the forest products open to investors.
  • Why it matters

    Why it matters

    A new law requires all direct investment firms to draw up proper prospectuses for customers, changing the way small operators operate and leaving some facing difficulties.

  • Facts

    Facts

    • The German Small Investor Protection Act came into force last summer.
    • It affects companies with “tangible assets,” which could include investment products such as valuable trees.
    • One German forest investment firm has been banned from offering its products by financial watchdog BaFin.
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    Audio

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The website of ForestFinance, the largest German provider of forest-related investments, features images of sun-drenched trees, forestry workers with huge smiles and a child hugging a tree. If you invest in this world, the website promises, you can make some real money: For example, 6.2 percent is the “average forecast return” for its WoodStock Invest scheme, and CacaoInvest can get you 7.5 percent.

No wonder that for years many Germans have been feeling good about investing at ForestFinance. So far, the Bonn-based provider says it has collected about €90 million ($102.6 million) from around 17,000 investors.

Now, however, the carefully created image of an ideal investment world is beginning to wilt. ForestFinance’s operations have been largely dormant for weeks, according to information obtained by Handelsblatt. The investment company is telling its sales partners that the reason for the inactivity is its sales prospectuses that are being “proactively” made subject to “an approval by the Federal Financial Supervisory Authority,” or BaFin, Germany’s financial watchdog.

Experts in financial regulation have never heard of the term “proactive approval.” An insider said, “Either you are required to publish a prospectus – then you have to submit your prospectus – or you aren’t, then you can’t submit anything.”

A teak tree, for example, needs at least 15 to 20 years until it grows tall enough to be chopped down and make a profit.

Whatever it was, the so-called proactive step was involuntary. Following the bankruptcy of German wind energy firm Prokon last summer, the German Small Investor Protection Act came into force. The final grace period ran out at the turn of the year. One effect is that direct investments, in which people invest without financial intermediaries, must now be marketed through full prospectuses.

Experts debate the law’s exact interpretation. Significantly, it’s unclear how one is to deal with investments in tangible assets – to what extent such things as ForestFinance’s teak trees are counted among them.

The company, founded by German entrepreneur and environmentalist Harry Assenmacher, apparently hoped to be able to get around the prospectus obligation, at least for the time being. The company commissioned legal opinions and submitted them to the financial oversight authority – where, according to Handelsblatt’s information, they were greeted with little enthusiasm.

Although BaFin won’t comment on the case, the regulators apparently sent a message that they didn’t share ForestFinance’s legal opinions.

Other investment providers are seemingly having the same experience.

Consider what the website of ForestFinance’s well-known German competitor, the Bavarian firm Miller Forest, says: “We are planning the approval by BaFin of our sales documents. For this purpose, we are putting together another prospectus.”

Berlin-based rival Lignum Sachwert Edelholz, on the other hand, simply continued operations despite the new Act until it was hit by a thunderbolt from BaFin. The authorities banned the company from continuing to publicly offer its products Nobilis Rent, Nobilis Priva and Nobilis Vita. The ban is in force until the firm can produce an approved prospectus.

The reason the financial oversight authority is taking a closer look at the subject of forests and plantations probably isn’t just because of the Small Investor Protection Act. An increasing number of providers in this field have recently become noticeable. Last fall, for example, BaFin prohibited Agrofinanz, which is based in Kleve near the Dutch border, from dealing in the investment business and ordered the immediate return of all money collected.

The actions spark reminders of the bankruptcy of the Frankfurt-based Green Planet two years ago. About 700 small investors had put their money in Green Planet’s teak and rubber trees to the tune of more than €20 million. A large part of that money is likely to have been lost.

The firm’s founder and longtime boss was accused of investor fraud, and the Frankfurt regional court gave him a nearly seven-year prison sentence at the end of last year. He has filed an appeal.

Distinguishing between reputable and disreputable providers is difficult for people interested in forest-related investments.

For one thing, a teak tree, for example, needs at least 15 to 20 years until it grows tall enough to be chopped down and make a profit. So investors know that it could be decades before they know if they’ll make money.

“Whether the dream of profits will be fulfilled is anybody’s guess,” said Stiftung Warentest, an independent German consumer protection group, in 2010. At the time, the firm warned about Swiss provider Life Forestry (a “highly speculative investment”), which was also marketing its products in Germany. Life Forestry is still soliciting the money of domestic investors via the Internet and rejects Warentest’s criticism.

ForestFinance likes to present itself as especially transparent and reputable in comparison to the competition and cultivates a connection with the “green” establishment. Two years ago, Jörg Sommer, the chairman of the German environmental foundation Deutschen Umweltstiftung, advertised for a fund supported by ForestFinance by using his organization’s official mailing list.

Careful research of such providers’ products usually raises questions. ForestFinance’s flagship product, WoodStock Invest, was sold in 2005 for €15,000 ($17,000) per hectare and a few years later it was at €35,500. According to the information brochures, the same hectare is supposed to yield up to €320,000, but industry experts say that’s highly unlikely.

A spokesperson for ForestFinance says that the forecast was “in fact unrealistic,” but “not entirely.” A return in the range from zero to 10 percent is considered possible – and this is also pointed out in the brochure.

So where does ForestFinance go from here? As soon as BaFin approves of the prospectus, the firm plans to resume its marketing.

 

Heinz-Roger Dohms is a freelance finance journalist. To contact the author: hr.dohms@schreiberdohms.de

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