Timberland: Nature’s Alternative Investment
A recent article from an organization called “Landthink” states that “tangible and “globally secure” assets attract investors during periods of economic and political uncertainty. As The Wall Street Journal reported in April 2017 (“Investors Shift Gears Amid Turmoil,” 4/21/17), gold prices reached their highest levels since November 2016, the yen continues to strengthen, and U.S. Treasuries continue to climb. These “haven assets” gain ground as volatility drives investors to safety. And trends for timberland investments indicate that forest assets benefit from this shift.”(source: www.landthink.com)
Investing in timberland may be unfamiliar to most mainstream investors… but it’s no stranger to institutional investors and high-net-worth individuals. Sources from 2014 indicate that large institutional investors have over $45 billion invested globally in timberland… and this trend has continued to accelerate. It was reported in 2014 that in the US alone, Timber Investment Management Organizations (management groups that specifically aid institutional investors and high net worth individuals in managing their timberland investments) managed over 23 million acres of forestland investments, representing approximately 7% of total privately owned timberland.
So what is it that entices investors enough to spend over $45 billion to invest in timberland – what makes it such an attractive investment?
Investing in timberland is attractive for many reasons; the following six are some of the most beneficial:
- Timber is an asset that increases in quantity on its own – through biological growth.
- Both the timber and the land are ripe for price appreciation.
- You can earn annual lease income from other natural resources on the land and from recreational usage.
- Timberland ownership offers portfolio diversification and acts as a hedge against inflation.
- Timberland is a “hard” (physical) asset with a limited supply.
- There are tax advantages to owning timberland real estate.
The first part of this series will begin with an insight into the benefits of timber’s biological growth.
A Continual Growth Play
As an investment, trees have a unique attribute: they physically grow. Influenced by species type, genetics, climate, soils and other factors, tree growth adds value to trees on a consistent basis. The United States Department of Agriculture’s Forest Service has developed a series of growth and yield models to accommodate growth predictions in various regions of the country. One of the more popular growth models for northern hardwoods is the USFS TWIGS model, that takes into account years of research to develop species-specific growth predictions given a wide variety of actual circumstances.
Though TWIGS is best used on site-specific areas, we had a chance to process a tremendous amount of timber data collected over 170,000 acres throughout southwestern NY and northwestern PA with the purpose of illustrating how certain hardwood species might grow over time.
Here is a summary of the resulting estimates of annual growth rates for several of the major hardwood species in this area:
- Red Oak: 3.75%
- White Oak: 3.69%
- Black Cherry: 5.11%
- White Ash: 5.02%
- Sugar Maple: 2.22%
- Red Maple: 3.44%
- Poplar: 4.20%
(Again, please note that these are only estimates based on a specific timber resource across a wide geographic area and are used solely for the purposes of illustration. Growth rates could vary widely based on location, soils and past management practices.)
Though highly unlikely to occur in the natural sense, let’s assume that a timberland investment contains an even mix of volumes from the species list above; this would result in a composite average annual growth rate of about 3.92%.
In other words, an investment in timberland containing an equal stocking of timber in the species listed above might appreciate at an average annual rate of 3.92%… merely because the trees on the property grow at that rate. This creates a “floor” return for an investment in timberland. Good forestry management and site conditions will improve these annual growth rates.
TIMOS and institutional investors certainly key in on biological growth rates as a major component of overall return. Realize too that, although there are certainly some economies of scale that make large timberland ownerships quite attractive from a return on investment standpoint, even small woodlots can contribute a wonderful return if managed properly.
In our next monthly issue of the Woodland News, we will explore the financial side of timberland investing. In the meantime, should you have any questions about this topic, please don’t hesitate to call us or visit our website at www.foreconinc.com. Looking for a timberland investment that may fit your portfolio requirements? If so, visit our real estate division’s website, www.timberlandrealty.net, for current offerings that may provide what you are looking for.