Forestry Investments – Past Performance and Investment Opportunities

Investors looking to diversify their portfolios and hedge their assets against the ravages of volatility in traditional markets will most likely have encountered a range of forest investments that promise the long-term investor superior inflation-adjusted and risk-adjusted returns.

But how has wood investment developed? And how does the smaller investor participate in this interesting alternative asset class?

First, let’s take a look at the past performance of forest investments as measured by one of the major timber investment indexes, the NCREIF Timberland Index; According to this basic measure of investment returns in this sector, this asset class has outperformed the S&P500 by about 37 percent over the 20 years between 1987 and 2007. When stocks delivered an average annual return of 11.5 percent, forest investments returned 15.8 percent.

At the same time, returns from investments in forest and forests have been shown to exhibit much lower volatility, an attractive trait for today’s investor.

Previously, most of the investment returns from forest investments were bought up by larger, institutional investors such as pension funds, insurance companies and university endowments, who collectively have invested over $40 billion in timber investments over the past decade.

So on to the second question; how do smaller investors participate in this alternative investment?

According to a study by University of Georgia Professor John Caulfield, returns on forestry investments are threefold;

  1. An increase in timber volume (organic growth of the trees), which accounts for about 61 percent of the return on investment.
  2. Land price increase accounting for only 6 percent of future returns.
  3. Increasing per-unit lumber prices, providing the final 33 percent of returns on investments for lumber landowners.

So, the best way to harness the power of timber investing is to take ownership of trees either directly or through one of the numerous forest investment funds or other structures.

timber REITs

One way for smaller investors to get involved in lumber investments is through a real estate investment trust (REIT). These investment structures are similar to mutual funds in that investors can buy and sell shares in the trust on an exchange, which REIT acquires and manages timber investment properties but, unlike regular companies, must return 90 percent of its profits to investors through dividends.

Some examples of timber REITs are:

Plum Creek Timber is the largest private forest owner in the United States and the largest timber REIT with a market cap of approximately $5.6 billion. Many investors have chosen this as their route in forest investments.

Potlatch is also a timber investment REIT

Rayonier generates around 30 percent of its REIT revenue from timber.

Weyerhaeuser divested itself of its paper and packaging business and will be converted into a REIT by the end of the year.

The Wells Timberland REIT is unlisted but can be purchased through Wells Real Estate Funds.

Another way for smaller investors to add forest investments to their portfolios is to buy exchange-traded funds that attempt to track the performance of timber returns. This is less direct than borrowing forest land or investing in a timber REIT, as the ETF can also invest in stocks of companies involved in the timber supply chain, including processors and traders. This means that investing in forestry through ETFs exposes the investor to some of the volatility of the stock markets.

The Guggenheim Timber ETF owns about 25 stocks and REITs from the global timber and paper industry with a 30% weighting in US companies.

The S&P Global Timber & Forestry Index Fund holds 23 securities and is 47 percent invested in the United States

Timber Investment Management Organizations (TIMO)

Those with more capital left can engage in forest investments through TIMOs, although the majority of these investment professionals require a minimum investment of $1 million to $5 million and a commitment to commit funds for up to 15 years. TIMOs essentially trade forest land, acquire suitable land, manage it to maximize returns for investors, dispose of it and distribute profits to shareholders.

Many experts believe that TIMO’s active management style allows them to be more responsive to market conditions than REITs and therefore not rise and fall with the market as much.

Direct forest investments

Anyone who has sufficient capital and the appropriate expert advice can invest in physical real estate. Commercial timber plantations are complex operations that require skills, knowledge and expertise to manage effectively and maximize yields while reducing risk.

For small investors or those with less capital, many companies offer investors the opportunity to buy or lease a small portion or lot within a larger, professionally managed timber plantation. Investors typically lease their land and trees, while the timber investment company plants, manages, and frequently harvests the trees on behalf of the investor.

Investor options range from species to species and region to region, with current opportunities in Brazil, Panama, Costa Rica, Germany, Nicaragua and other, more exotic locations such as Fiji.

Investors should be cautious as many of these direct forest investments are preferred with huge commissions for sellers and promoters, with many “agents” offering up to 30 percent commissions on the sale of land to investors and in many cases even no due diligence exits.

In some cases the author has seen forest investment properties in Brazil packaged up and sold to investors for over £100,000 per hectare. Investors should seek advice from an independent advisor experienced in this alternative asset class who will be able to provide a full package of due diligence material, including an independent valuation of the forestry investment properties on offer.

summary

Investors choose forest assets for their inflation-hedging properties and their ability to generate an uncorrelated return over the long term.

The performance of the asset class is driven by the demand for timber weighed against global supply and over the long term we are consuming timber faster than we can grow it, making timber assets an attractive asset class for investors looking for stable, long-term capital growth within their investment portfolio.

Investors considering what type of forest investment is right for them should consult with an advisor who has experience and expertise in the industry.