Why Invest In Timberland?
OVERVIEW
A timberland investment is one whose primary source of return is derived from the growth and harvest of timber. As an asset class, it offers particularly attractive benefits to the long-term investor. They are:
- Timberland investments have historically provided competitive returns relative to its risk profile. Such returns hold up well against many traditional asset classes, including stocks, bonds and real estate.
- Because of its unique nature, timberland often performs differently from securities or other investment assets. As such, it can offer an excellent opportunity for diversification when added to a broad portfolio of investments.
- Timberland-a renewable and biologically growing asset-represents an array of advantages among alternative investments.
How are timberland investments characterized?
There are a variety of ways to approach timberland as an investment. Some would classify it as private equity. An argument for this classification could be made because many of the purchases of commercial timberland for investment purposes have been made through private equity investments structured and managed by a timberland investment management organization (TIMO).
Another way to view timberland investment is a specialized form of long-term bond. A forest that holds mature timber will generate cash each year through the harvest and sale of timber. These harvests can be modeled and forecasted with a reasonable degree of accuracy over many years, even decades. Since timber growth and subsequent harvests are not affected by the movement of financial markets, the forest investment could be structured to act and behave in many respects like a long-term bond.
Aside from private equity and fixed income, timberland is real property and can be classified as an investment in real estate. While traditional commercial real estate generates income from leasing, timberland derives its income from the periodic sale of timber.
What is the invested universe of commercial timberland?
It is estimated that institutional investors globally now own about $35 billion worth of timberland. Of that amount, about $25 billion is invested in the United States, which represents the world's largest producer and user of timber products. Over the last 20 years, timberland has emerged as a viable institutional asset class among almost 100 private pension, foundation, and endowment funds. Even with these commitments, institutional owners own approximately 8% of the investable timberland in the U.S. The principal owners of timberland are private, non-industrial landowners ($150 billion). This large investable timberland base represents continued opportunity for institutional investors, particularly as private landowners and forest products companies continue to sell off their timber holdings.