Institutional investment in timberland accounts for more than $40 billion according to Hancock Timber Resource Group year-end 2007 estimates. Historically, investments in timberland have provided total real returns (net of inflation) of 6-10 percent, and nominal returns of 9-15 percent.
History of timberland investing
In the US beginning in the mid-1970s, two forces accelerated institutional ownership of timberland: passage of the Employee Retirement Income Security Act (ERISA) in 1974, and increasing sales of timberland by large forest products companies. The ERISA laws encouraged institutional investors to diversify away from traditional fixed-income securities, and led them first to greater investment in stocks, then to investment in other assets such as commercial real estate. Ownership of timberland real estate provided yet another opportunity for diversification. During this same period, forest products companies began to evaluate the strategic role of their timberland holdings. Some saw the value in their forests, particularly in the underlying land, as potential capital. These companies could sell their timberland, with the proceeds being invested in wood-processing facilities. This, however, raised the question of who would buy the land. Pension funds and other institutions with vast amounts of capital, and a legal mandate to diversify their investments, became logical buyers of this timberland.
Natural investment characteristics of timberland
A unique characteristic of timberland is that it functions as both a factory and a warehouse. In other words, timber can be grown and then "stored on the stump." This gives investors the flexibility of harvesting trees when timber prices are up, and delaying harvests when prices are down. Timber is also a renewable resource that increases in value as trees mature. Consequently, larger diameter trees are disproportionately more valuable than smaller ones.
Timberland investment risk
The primary risks of timberland investing include market uncertainty (fluctuation of timber and timberland prices), relative illiquidity (compared to stocks and other financial assets) and environmental risk (natural hazards or legislation related to threatened or endangered species). An experienced forest management firm can mitigate these risks, and geographic diversification of timberland further offsets risk associated with a specific region.
Portfolio diversification characteristics of timberland
Because timberland investments tend to move countercyclically with stocks and bonds, and independent of the real estate sector, timberland can provide portfolio diversification. Timberland is most commonly placed in the real estate portfolio, but it can also be placed in an alternative or specialty investment portfolio. Some larger institutional investors may also place timberland in a natural resource allocation.
Timberland investment outlook
In addition to owning timberland in the three major timber-growing regions of the United States (South, Pacific Northwest and Northeast), institutional investors now own timberland in Argentina, Australia, Brazil, Canada, Chile, New Zealand, South Africa and Uruguay. Demand for timber is expected to increase as economies in the United States and abroad continue to grow. Environmental pressures will also continue to shrink global timber supplies. As institutional ownership of timberland has grown, a greater variety of investment vehicles have also become available to investors. The development of new strategies and vehicles has been motivated by both the search for higher returns and the desire for greater alignment of interests between investors and advisors.