Forest and timberland markets ripe for investment
Institutional investors’ appetite for forestry and timberland is on the rise across the globe, due in part to their searching for alternative income sources following the flatlining of other, more traditional investment classes.
With the world’s timber industry beginning to adapt to institutional capital’s stewarding requirements and the environmental, social and governance of the arena, more than ever before the sector seems ripe for the picking.
With underlying demand for forest and wood products continuing to increase across the globe, the growth in the investor marketplace comes as no surprise. What is a surprise, however, is just how fast investors are flocking in, driven by major growth for these products in powerhouses such as China, despite the country’s recent economic stagnation. Bob Flynn, director, international timber at RISI, told IPE Real Estate: “Even with the recent slowdown in China’s economy and construction, Chinese demand for wood is still increasing. China is the major driver of international trade in forest products.”
“Whether investors are growing trees in New Zealand, Australia, western North America, or Latin America, they are often producing wood whose end-market will be in China,” added Mr Flynn.
IPE Real Estate also reported that there was around $1 billion of institutional capital linked to the timber sector 10 years ago. Indeed, scale will continue to matter as timber will remain a concentrated marketplace despite its growth, with the next few years likely to see a wider range of timber and forest-product strategies being offered by investment managers.
RISI, a Boston-based forestland research and consulting firm confirmed that the world’s top 30 timber investment management organisations hold around $57 billion of managed assets between them, discounting the real estate investment trusts also held by them. Of those, the five biggest firms make up more than half – 54 per cent – of the total, with the biggest 10 of these organisations accounting for around 76 per cent of total assets.
Related research from Sydney-based forest investment firm New Forest’s 2015-2019 Timberland Investment Outlook found that the majority of timberland investment is concentrated on a series of developed markets. Between 80 and 90 per cent of the investment levels target Canada, New Zealand, Australia and the US. However, Latin America, Africa, Europe and Asia are also increasingly being targeted, says the firm. New Forest founder and CEO David Brand told IPE Real Estate: “While institutional investment in timberland and ecosystem services expands, the nature of the forest sector is evolving. Investors need to navigate a maturing asset class and position their timberland portfolio to benefit from shifts in market conditions and competitive dynamics.”
In terms of the US market alone, the index from the National Council of Real Estate Investment Fiduciaries (NCREIF), entitled the Timberland Fund & Separate Account index, revealed a 0.4 per cent gross return in the quarter to the end of September 2015. This followed a gross return of 9.29 per cent over 2014 and 9.76 per cent over the previous three years. The NCREIF requires funds and accounts to have the vast majority – at least 95 per cent – of their assets held in US timber as well as timberland, timber leases, deeds and cutting rights, highlighting the ongoing importance of the sector.
With interest rates at historic lows, the forestry asset class offers investors a total return of value gains and land ownership, highlighting the attraction for investors who have long-term commitments, including pension funds. Forestry also offers real income growth from crop harvesting.
James Barrett, GWD Forestry spokesman, said: “Forestry as an asset class is indeed ripe for the picking, with investors enjoying the multiple returns that come from the investment. From the long term gains including land values appreciating, to the income growth that can result from crop harvesting, forestry is increasingly pressing investors’ buttons.”