Timberland is an asset category with unique attributes. Institutional and private investors have sought timberland as a portfolio diversifier, complementing investments such as stocks and bonds. As an asset class, timberland exhibits characteristics that make it particularly attractive for investors with the appropriate time horizons and liquidity appetite:
- Attractive risk-adjusted return
- Low correlation with other asset classes
- Effectiveness as an inflation hedge
- Real asset without counterparty risk comprised of real-estate and standing timber
- Potential higher and better uses, such as recreation
Gains in timberland are realized through the combination of biological growth of trees, shifts in underlying timber prices, and land value changes. As a tree grows into larger and higher product categories, its economic value per cubic meter rises. Timber is a store of value “on the stump” and can be harvested when prices are favorable to optimize returns. During periods of declining prices, biological growth counters the impact of lower wood product prices and managers can defer harvests until market conditions shift.
Indeed, timberland’s long-term performance on a risk-adjusted basis has surpassed most other asset classes. Over the period spanning 1987-2012, the NCREIF Timberland Index generated an average annual return of 12.5%. Only three years during this period were returns were negative, highlighting the resilience of timberland to economic downturns.
While future timber price movement is unknown, the macroeconomic supply and demand fundamentals are support a case for upward movement, buffeting by growing consumption, particularly in emerging markets, and increasingly limited supply as countries restrict logging practices.
“Global production of industrial roundwood is expected to increase by slightly more than 40 percent up to 2030. This is considerably less than the projected rise in total wood and fibre demand (which is expected to almost double)…”
As timberland prices have risen in mature markets, such as the US and Europe, returns have fallen, prompting investors to look beyond traditional jurisdictions. Increasing numbers of funds have sought exposure to timberland in emerging markets where input prices tend to be lower and local wood markets have grown rapidly.
Advances in forest technology and plant genetics in conjunction with fertile soils have permitted the Latin American region to achieve high level of timberland productivity. In recent years, institutional investors have begun to enter into such markets, a trend that is expected to continue in coming years with commensurate capital gain potential for early entrants.
“… [T]here will be shortages of high-value species and premium quality woods due to past overharvesting. Timber production from both forest and agricultural plantations will increase over the near future, providing wood for pulp and common sawtimber. Premium woods from large and old trees of highly valuable species are scarce in most regions. They may be restored through protection and sustainable forest management in the longer term but will remain in short supply for the foreseeable future.”
“…Hardwood species with special technical properties (strength, natural durability and good machining properties) and appearance (grain, figure, texture and colour or aesthetic qualities) that makes them suitable for ‘high value end uses’. These high-grade hardwoods contrast to lesser quality woods used only for woodfuel or pulpwood. The special characteristics of valuable hardwoods lend them particularly well to specialty markets, which are usually also the highest value markets.”
Teak (T. grandis) is the predominant hardwood species cultivated on plantations in Central America. Due to depletion of commercial stocks in teak’s native Myanmar leading to increasing restrictions on harvest and firm demand, particularly from India, the investment case for plantation teak is more compelling. Indeed, teak has experienced long-term appreciation in real terms.
“Over the last 30 years, teak log prices have increased at an average rate of 8.3% per annum compounded. The basis for the sharp increase is due to rapidly declining supply and rising demand.”
Although plantation teak is a lower-value grade, its price behavior is correlated to that of natural forest teak.
Most importantly, Panama Forest Services maintains the highest commitment to social and environmental standards, viewing this is a win-win proposition for investors and communities:
“Multi-purpose plantations, designed to meet a wide variety of social, economic, and environmental objectives, can provide key ecosystem services, help preserve the world’s remaining primary forests, and sequester an important proportion of the atmospheric carbon released by humans over the past 300 years.”