timberland investment returns
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Timberland investment returns

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As a hard asset that offers investors both long-term capital appreciation and the option to time some percentage of their ongoing cash flows to evolving supply, demand and pricing conditions in global timber markets, timberland has been shown to have excellent inflation-hedging characteristics.

Invest across different regional or local markets. Consider the size and distribution pattern of investment properties. Hold different maturities or ages of timber. Hold investment funds or accounts of different vintages. Hold different commercial tree species. Grow and sell different log products. Pursue a range of non-timber income sources. Diversify across timberland investment managers or funds. Pursue different investment strategies or models.

Buy different types of timber assets, such as fee simple, cutting rights and timber leases. Aside from offering competitive risk-adjusted returns and portfolio-diversification benefits, timberland also has other unique characteristics that institutional and high-net-worth investors usually find attractive.

Foresters often describe timberland assets as having characteristics that make them analogous to both a factory and warehouse. However, that same forest also can behave like a warehouse because it provides the capacity to store that increasing value on the stump until supply, demand and pricing dynamics are advantageous for realizing cash flow. Timber is an asset that naturally increases in value through time because as a tree increases in size and volume it tends to become more valuable.

This is because larger trees are typically used to produce higher-valued products. In many parts of the country, for instance, softwood trees, like pine and fir species, which are often grown in intensively-managed plantations, move through their financial value chain as they grow through their biological life cycles. Trees that are 8 inches in diameter or smaller are considered pulpwood, which is largely used to manufacture low-value products like paper and packaging.

Pulpwood also is a common feedstock for bio-energy applications, like renewable fuel pellets. Trees between 8 and 12 inches in diameter fall into the chip-n-saw grade. Chip-n-saw logs are most often used to produce smaller-sized lumber e. Finally, trees 12 inches or larger in diameter are considered sawtimber.

They are used to manufacture high-value products like dimensional lumber, plywood, paneling, flooring, furniture and decorative veneers. Likewise, timber price increases tend to have a favorable, compounding influence on the performance of a timberland investment. This optionality, the capacity to determine when cash flows will be realized, is a unique and highly-prized feature of timberland investment.

Timberland investment portfolios can be structured to meet a flexible array of investment objectives. Higher cash flows can be achieved by including a greater proportion of mature timber holdings in a portfolio. If capital preservation and long-term asset appreciation are the goals, these can be achieved by acquiring younger working forests whose growth rates can be further enhanced through the application of intensive forest management practices.

If an investor seeks a balance between generating intermittent cash flows and fostering long-term asset appreciation, a portfolio can be structured to include a variety of timber age classes. In addition to these benefits, timberland returns can be improved by utilizing a range of sophisticated investment structuring and management strategies.

You are an advocate of timberland investing for the 21st century. How has timberland investment changed during this new century? Financial investing in forests really started about 35 years ago when ERISA rules were relaxed and pension funds were able to invest more broadly, and institutional investors began investing in forestland. Given the limited investors and knowledge of the asset class, returns from timberland investing were around 20 percent that first decade.

As the number of investors increased and the market realized the benefits of the asset class, those investment returns have declined. During the past decade, NCREIF, which is the financial benchmark for forestland investing, has reflected about a 5 percent return. However, with declining returns from conventional management approaches that are exclusively focused on timber production, the new innovation is to invest in the full array of products and services forests offer.

These include new products like biofuel and biochar to ecosystem services such as carbon storage, habitat, water protection to the growing demand for recreation and scenic values. There are emerging tools to monetize these new services and benefits for investors, such as carbon credits, conservation and recreational easements, and mitigation payments. In a carbon-constrained world with a growing population and shrinking resources, this new approach to forestland investing can meet investor needs while actively addressing climate change, biodiversity loss, and water scarcity.

Climate-smart forestry is an innovative investment approach to forestland investment and management that monetizes the full attributes of the forest, not just the timber aspect, while improving the forests, biodiversity, resilience and carbon storage capability. There is a growing public recognition that natural intact forest ecosystems across the globe need significant protection and investment in the face of climate change.

Forests produce a wide variety of important goods and services. The primary product that usually springs to mind is wood for building materials, which fulfills a basic human need. While the level of demand — for example, expressed in housing starts — may fluctuate from year to year, building products are a basic need that will never go out of fashion. The beauty of forestland investing, especially in natural forests, is that the primary source of value creation is the biological growth of forests, and this growth comes from free inputs — sunlight, water and soil nutrients.

Depending on the productivity of the forest, biological growth can contribute a 3 percent to 8 percent annual increase in inventory. In addition, while the trees are waiting, they continue to add value through growth, expressed both as an increase in volume and an improvement in value as larger trees generally contain more valuable wood. Forests can wait patiently through market downturns, trade wars and elections, with low holding costs providing additional flexibility.

In addition to providing building materials and pulp and paper, forests play very important roles in carbon storage, water provision, habitat for millions of species, and soil formation, as well as recreation, foraging, hunting and scenic values. From an investment perspective, the question is: How can these values be monetized for forestland owners and investors?

There are a number of regulatory and voluntary carbon markets. California has one of the largest, a cap-and-trade regulatory system that places a cap on emissions and reduces that cap over time. To meet the cap, manufacturing plants, utilities and other emitting entities have a couple of options to reduce emissions.

They can make investments in their own plant or facilities, they can buy allowances from other regulated entities, or they can — and this is where forests come in — buy offsets from forests that are storing carbon above and beyond usual practices.

The forest owner then enters into a year contract or obligation to store carbon to offset the emissions from the entity that is under the cap. Forestland investing typically requires a long hold period relative to most other asset classes and investors have several options to gain exposure to forestland investments. Investors may hold forestland properties directly and then the hold period is determined by their length of ownership.

More commonly, if they are investing through a pooled vehicle, these are typically structured similar to private equity funds that have to year hold periods. This structure allows investors to benefit from the biological growth of trees that can translate to capital appreciation. Forests can grow anywhere between 3 percent to 8 percent per year, depending on the species and geography. There is also an increasing recognition of the need to hold forestry investments in perpetuity and increasing investor appetite for evergreen fund structures or emerging corporate structures that allow for longer term ownership.

Certain investors who can allocate to pooled funds for longer periods will benefit from, and can realize the value of, complete rotation cycles in forests from when a tree is planted to harvested. These structures also allow managers to invest in innovative, longer-term projects or entice processing facilities to locate near their forests, giving them the opportunity to monetize future opportunities such as biomass to create jet fuel or other bio-based plastics.

The catastrophic forest fires are a signal that something is seriously wrong with the health of our forests, and it is not just the changing climate. Forest degradation and fragmentation, with the resulting changes to species composition and forest structure, are a significant factor.

If you then add houses, utility lines and other structures pushing ever deeper into the forest, you have additional sources of fire ignition. Finally, and paradoxically, fire suppression in fire-adapted forests, such as the forests of the western United States and Australia, builds up fuels and creates the conditions for catastrophic fires.

After decades of fire suppression and changes in forest composition to tree species that are not adapted to fire, a lightning strike or abandoned campfire can turn into a catastrophic fire consuming hundreds of thousands of acres. If you then add a warming climate with the resulting lower moisture content and erratic weather patterns, you get the result we are seeing in the news repeatedly — more fires, bigger fires and an extended fire season.

We can and should address this challenge vigorously through a number of strategies: First, we should limit further fragmentation, development and sources of ignition — such as powerlines — in intact forests. Second, we should address forest health by thinning overcrowded stands, replanting and favoring fire-adapted species such as Ponderosa Pine, and addressing slash piles left behind by logging operations. We need regional-scale plans, which include adding wood processing capacity to appropriately thin forests and create fuel breaks where needed.

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There are a number of ways to invest in timberland besides buying the land as an individual investor. Some of those investment vehicles include:. Weyerhaeuser Co. Real Estate Investing. Your Money. Personal Finance.

Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. What Is a Timberland Investment? How Timberland Investments Work. Making a Profit with Timberland. Risks of a Timberland Investment.

Real-World Examples. Investing Commodities. Key Takeaways Timberland investments involve ownership of productive forest lands. Large institutional investors such as public and private pension funds primarily use timberland investment instruments. Timber ETFs exchange-traded funds are comprised of many companies that own forests and produce timber-related products.

There are multiple ways in which investors can earn a rate of return on a timber investment including biological growth, and price and land appreciation. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Learn more about REITs. A commodity ETF is an exchange traded fund that invests in physical commodities, such as agricultural goods, natural resources, and precious metals.

What Is an Alternative Investment? An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Racial Justice Investing Racial justice investing is a form of socially responsible or impact investing aimed at promoting racial justice, inclusion, and diversity. Timberland provides numerous benefits that distinguish it from other investments.

A tree does not know what a market bubble is and it has never heard of the War on Terror. Trees grow every year, through wars, recessions, and market crashes. One of the primary advantages of owning timberland is it does not have to be harvested every year, unlike fruits that ripen just once and then have to be picked or row crops that are dependent on commodity prices. Instead, forests grow exponentially on the stump for years. Investors retain profits on the stump and wait for a more profitable time to sell timber — most likely, when timber prices are in their favor.

As an investment, timber has several favorable attributes. First, it's a hedge against inflation. Consumer Price Index by a year and those returns are highly positively correlated with inflation. Timberland is an asset that will preserve capital in the face of rising consumer prices.

Timber performs especially well in bear markets. Though timber has seen some sluggish years lately, the long term trends are positive. Additionally, timber is a sustainable, renewable resource. It can be replanted and re-harvested over and over again. There are many different timber types and uses, and investment returns vary by geography and the economic conditions associated with the end products. Hardwoods are a smaller component of wood production and consumption in the US, with uses in consumer applications such as furniture, cabinets, flooring, and industrial applications such as truck beds, railroad ties, and pallets.

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How to Invest In Timberland

U.S. timberland investment performance is measured by the NCREIF Timberland Index, a composite of a large pool of individual private timber investment properties. Over the past 15 years, the NCREIF Timberland Index has. yolic.xyz › timber-investing-a-valid-long-term-growth-strat. Timberland investment involves investment in land that producers timber. There are millions of acres of timberland in the U.S. that are owned by pension funds.