Forestry investments continue to rise on back of global demand
Far from being just an interest for environmentalists, the need to tackle climate change and deforestation has also become a hot topic among investors.
Those looking at alternative investment vehicles are increasingly viewing forestry and timberland as a money-making option, with research suggesting that both the value and volume of forestry investments are increasing at a healthy rate.
According to a report by the World Bank’s Program on Forests (PROFOR), around $80 billion worth of forestry investments were made in 2014. Fabian Huwyler, sustainability vice president at Credit Suisse, is confident this market is only going to increase. Indeed, he said at a recent conference in London that investors could put between $200 billion and $300 billion a year into forestry as returns become more lucrative.
The need for private investment
The need to protect the world’s forests is well established. But what this has in turn created is a huge opportunity for investors across the globe. Indeed, PROFOR states in its report entitled ‘Private Financing for Sustainable Forest Management and Forest Products in Developing Countries – Trends and Drivers’ that the forest community “recognises that the private sector has a role to play in financing sustainable forest management (SFM)”.
It goes on to explain: “There is a considerable gap between the $70 and $160 billion that SFM needs each year, and official development assistance to forestry, which only covers about one per cent of the estimated total financing need.”
As such two things have become clear: the world needs to protect its forests and to do so it needs the help of private investors. And investors have been ready to answer the call, with forestry investments becoming an increasingly popular option within people’s investment portfolios.
But forestry investments are not done out of charity and no doubt investors’ willingness to opt for forestry and timberland as a form of alternative investment has been bolstered by the fact that timberland returns have increased each year for the past five years, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). Reflecting better economic conditions, NCREIF’s Timberland Index posted a total return for 2014 of 10.48 per cent, consisting of 2.86 per cent from income and over seven per cent from price appreciation.
Timber investments can take a while to come to fruition because of the simple fact that the trees take time to mature. However, the great strength of this long-term investment is that the material – the timber, pulp, wood chippings, etc. – can be sold when the market conditions are favourable; if the market is not performing well, the trees simply keep growing.
An innovating industry
But a marked change has also arrived in the forestry industry that will likely be of interest to investors and that is the genetic modification of the plants.
An example has recently emerged from Brazil where Fibria, the world’s leading eucalyptus pulp producer, has been making huge strides forwards with the help of systematic cloning programmes. Essentially the forestry company has been able to create DNA clones of the best eucalyptus trees in its giant plantation to in turn ensure maximum output.
The results have been remarkable; in the 1970s the company says that for every hectare of forestland it had it would usually collect 6.4 tonnes of cellulose – the pulp from the eucalyptus trees that is the fundamental ingredient of paper. By 2015, when Fibria was on the fourth generation of its cloned trees, productivity had almost doubled, with 11.2 tonnes of cellulose collected per hectare. The company expects more progress too – by 2025 it is targeting 15 tonnes of cellulose for every hectare of trees.
This illustrates that while forestry investments might be seen as a safe and steady long-term investment, there is in fact a great deal of innovation taking place in this space.
To return to the start, the huge global demand to protect forests and tackle climate change has in turn been making timber and other wood-based products and by-products increasingly precious. Unsurprisingly therefore, innovation in the industry is becoming more common as companies and investors look to maximise output.