Nathan Vanderklippe, Financial Post, Tuesday, August 19, 2008

VANCOUVER —It doesn't take much of an eye to see that Capes Lake, a 5,100-hectare plot deep in the heart of Vancouver Island, is a magnificent piece of property. The size of Bermuda, its wooded stretches encompass a waterfall, lakes and alpine meadows in such pristine seclusion that its current owners call it the Garden of Eden.

But for TimberWest Forest Co., that garden hasn't been very productive. Its steep terrain made it difficult to cut trees, and many have been left standing.

So TimberWest put the Capes on the market and primed it for a sale as recreational land, part of a move by it and Western Forest Products, who together own most of the forest land on Vancouver Island, to transform 82,000 hectares of forest to higher and better uses. Most of it will be developed.

But along the way, they've also begun turning Vancouver Island into a playground for the ultra-rich. The Capes will be sold -- for a cool $25-million -- as a "kingdom" property, the kind of vast estate that draws attention from only the most rarefied strata of society. And it's only the first one: Over the next 15 years, TimberWest plans to sell dozens more like it, although they will be smaller, radically transforming some of the most picturesque swaths of B. C.'s land from bad forest to lap of luxury.

"We believe it's a niche in the market, for people who are looking for relatively substantial pieces of land," says John Hendry, the company's vice-president for real estate. "They want some sort of privacy, they want the ability to hand land down generation to generation -- that's one of the things that drives this. And they're looking for land that has specific character."

The Capes property has attracted interest from the Middle East, and from wealthy Americans keen on buying land for conservation purposes. Land of that calibre does sell in B. C., but rarely on the coast. Instead, the ultra-rich have traditionally frequented the province's interior.

"The past large sales in the province have been ranches. The biggest sale that ever took place was the [200,000-hectare] Douglas Lake ranch. That sold twice over the past eight years -- first of all to [former CEO of ] Worldcom Bernie Ebbers, then the second time to a guy that married a Wal-Mart sister," says Rudy Nielsen ... president of Landcor Data Corp.

But a land sale like Capes is, he says, without precedent.

"I can't remember a parcel this big and this prime," he says.

In the United States, the march from forestry land to developed land is, however, not new. In the past 15 to 20 years, an estimated 12 million hectares of forest land have been "de-accessioned" by timber companies, said Eric O'Keefe, editor of the upmarket Land Report magazine.

The reason is simple. "Timber is in essence a crop, and when you're going from cropland status to retail pricing status, obviously you're charging substantially more per acre than you would if you were just producing a commodity," he said.

In Canada, however, the vast majority of forest land is publicly owned. Only on the coasts of the country do forest companies own their land, and only in recent quarters, with bottom lines bleeding, have they begun to sell it off.

It has gotten so bad that Timber-West recently announced a potential capital reorganization and, according to Equity Research analyst Kevin Mason, Western has little choice but to sell its land.

"Based on their last quarter and our expectation for how things are progressing, they basically have at max a year's worth of liquidity," he says. "If there isn't some land sales, they're going to have some serious financial difficulties."

Those sales could, however, bring serious money. Western estimates its hectares are worth $150-million to $180-million -- it has already sold $50-million worth -- while RBC Capital Markets analyst Paul Quinn has calculated the value of TimberWest's land at $800-million. That is largely because it's on Vancouver Island, which is exploding as a retirement and outdoors haven, making it that much better, he said.

"They've got some beautiful stuff," he said. "I just wish I had the money."

The timber sales are, he said, "in everybody's best interest. It diversifies the economy away from forestry, which happens to be cyclical, and moves it into more normalized cash flow in terms of recreational real estate or residential, or that type of use."

Not everyone agrees, however. Western's bid to sell its land has stirred a hornet's nest that culminated this summer in a damning Auditor-General report. The report blasted the B.C. government's handling of the decision to allow Western to sell its forest lands for other purposes.

Mr. Mason says controversy is likely to continue dogging forestry companies as they develop timberlands in a province with a sworn allegiance to all things green.

"People are angry that this land was taken out of forest and is being sold off," he said. "It's the NIMBY mindset gone mad, and I think that mindset is huge over the whole Vancouver Island, and it's becoming more and more of a problem."

Yet, if nothing else, that attitude strengthens the case for Timber-West's kingdom properties. Capes, for instance, is in the backyard of no one but Strathcona Provincial Park. It is completely unserviced; most is not accessible by logging road.

And while Stephen Bruyneel, TimberWest real estate director, says properties like it will form the minority of the lands the company sells, there is no denying the marketing value of a tract that most people will only be able to dream about.

"It's like your own personal Garden of Eden," he said.