Frequently Asked Questions
Questions About Timberland Investing
Why do investors choose timberland as an investment?
Timberland investing has multiple benefits including portfolio diversification, serving as a hedge against inflation, and a low correlation with other investment instruments such as stocks and bonds.
What types of investors does timberland attract?
Timberland attracts both private and institutional investors, including pension funds, corporations, foundations, endowments and family offices.
How long does it take to grow a tree?
Depending on species and site conditions, it can take anywhere from 10 to 80 years for a tree to develop into merchantability. Good timberland investment properties generally contain a diverse mix of age classes and, in some cases, species present on the property. The rate at which trees grow however, does not necessarily impact future performance.
How are timberland investment returns generated?
Timberland returns are realized through timber sales, lease income and land sales.
How much money have institutional investors placed in timberland?
Timberland investment by institutional investors accounts for approximately USD 45 billion as of 2011.
What are the risks involved in timberland investing?
The primary risks associated with timberland investments are commonly referred to as price risk, volume risk, and asset value risk. Price risk refers to the volatility associated with future timber and timberland prices. Volume risk includes the risk of inaccurately estimating standing inventory, and asset value, or liquidity risk, implies the risk associated with realizing expected disposition values.
While considered negligible on professionally managed properties, the risk most commonly associated with timberland is the risk of fire. By maintaining healthy forests through active management and reducing dead and dying trees, the risk of fire is greatly minimized (see below). Disease, endangered species, and timber theft, all negligible on professionally managed properties, are other types of volume risks attributed to timberland.
How is timberland investment risk mitigated?
The risks of timberland investment can be minimized by actively managing properties in a sustainable manner; maintaining healthy trees. Aside from active management, diversification among timber regions reduces the volatility within individual markets.
What are the liquidity characteristics of timberland?
Timberland investing generally requires a commitment of 10 years or more to the asset class and is illiquid relative to stocks or bonds. However, if an investor wishes to liquidate their timberland holdings, the disposition process can be initiated quickly.
Who buys timberland?
Timberland investors include other timberland investment management organizations, (TIMOs), forest product companies, private investors, federal or state governments, and conservation groups.
What happens if there is a forest fire?
Historically, less than 0.5 percent annually of commercial timberland owned by institutional investors has been damaged by fire, insects, disease and other natural hazards. In addition, history has shown that 80 percent of all timber harvested following a forest fire is merchantable. For instance, when Mt. St. Helens erupted in Washington in 1980, 85 percent of the timber salvaged was sold for sawtimber or pulp. By building and maintaining excellent road systems, diversifying timberland ownership and using modern forest management techniques such as fire breaks, timberland investment managers can minimize fire's impact on portfolio performance.
How is a timberland investment portfolio diversified?
Timberland investments are typically diversified by property location, timber market, tree age, species and end products. Most importantly, by investing in timberland among different regions, investors can offset the risk associated with investing in only one area.
What factors affect the price of timberland?
There are several factors that affect timberland prices, but the most important include current and projected timber prices, timber inventory, investments in forest productivity, operating costs and the required rate of return or discount rate.