SUSTAINABLE INVESTING IN THE FORESTRY INDUSTRY
Alongside Timberland’s ability to stabilize and diversify traditional portfolios, it is increasingly becoming recognized as an attractive investment because of its value as an intrinsic inflation hedge.
Timberland Investment Management Companies (TIMOs) emerged in the 1980s. These pooled investment companies offer more strategy than traditional investing, as well as increased tax benefits.
Forestry investing is becoming recognized as a distinct asset class. Unlike other classes, the majority of returns are based on biological growth, presenting a unique set of advantages and risks. It is estimated that 65% to 75% of returns are generated by physical growth, while only 25% to 30% are derived from timber price appreciation. This asset class also offers management companies flexibility to determine the quantity of timber to harvest at any particular time.
TIMBERLAND INVESTMENT HISTORICAL RETURNS PER REGION
AIMCO study on Timberland 2011
|Developed regions/countries 6-8% real||Newly developed 8-12% real||Developing 13-19% real||Frontier 20+% real|
|Canada||Uruguay||Central/Eastern Europe||Southeast Asia|
|New Zealand||Chile||Aregentina||East Africa|
Returns can be generated from a variety of sources, with one of the most innovative being carbon credits. Value is added to timberland ownership through sequestration of carbon to offset emissions; returns are amplified by 1-2% by means of carbon credits.
Other, more traditional methods of generating returns include the sale of paper products, pulp, timber and land rights for recreational and mineral use. Biofuel is yet another growing demand in the market for its use as a carbon-neutral energy alternative, calling for fast-growing plants, such as eucalyptus. Timber is similar to other investments in that prices are cyclical, yet while most other industries have products that decrease in value as inventory, trees can be left to grow when the price is low, increasing their value.
Timberland demand continues to grow as countries amend their building codes to allow high-rise wooden residential and commercial buildings. Investments in timberland rose in value in three of the four 21st century market collapses and are the only asset class that has demonstrated this resilience.
International forest ownership is another dominant trend in the forest management industry, offering better climates for woodland growth and giving investors the opportunity to choose from a greater selection of species. A relatively small portion of our portfolio includes eucalyptus plantations.
With increasing populations, the demand for forest products is rising, and certain countries, including Costa Rica, Panama, Honduras and Argentina, offer climates that can promote the growth of quality timber to meet this demand.
From a consumer standpoint, plantation wood offers consistency in quality. Awareness of illegal logging has encouraged consumers to become more selective when choosing their products and to look for certified, sustainable lumber from plantations.
MAHOGANY & TEAK INVESTMENTS
Along with the benefits of this industry, timberland investments also include significant risks that must be efficiently managed to be profitable for investors:
- The price volatility and seasonal highs and lows can be mitigated through strategic scheduling.
- Supply and demand vary based on productivity and substitution of other products. Productivity can be managed with due diligence with management companies ensuring that there are no unexpected complications through the life of the investment.
- Due to the nature of the investment, timberlands are also exposed to physical risk; trees can be damaged by disease, insects, weather, and fire. Reputable management firms will offer appropriate insurance alternatives to protect the investments of their tree partners.