Timber as an asset class has become more attractive to investors in recent years for many reasons and, as an asset, it offers some unique advantages. Primarily though, forestry investors get a tremendous sense of reassurance from the simple fact that the majority of their returns will be generated from predictable biological growth.
It is the inescapable fact that trees increase in volume (by an average of between 2 and 8 per cent each year, depending on factors like age, species and climate) that is perhaps the most attractive of the asset’s attributes. This reliable, tangible growth is ever-more valuable to those looking for a safer place for their money within an unpredictable economic climate.
Jeremy Grantham, a US-based investment manager at GMO, which manages over $100 billion in client funds, effectively articulated some of the asset class’s main advantages in the following statement: “Forestry remains, in my opinion, a good diversifier if times turn out well, a brilliant store of value should inflation unexpectedly run away, and a historically excellent defensive investment should the economy unravel.”
Grantham often reiterates to his clients the fact that timber prices in the 20th century grew at a rate consistently 3 per cent greater than inflation.
Timberland is one of the newest forms of alternative investment, at least in its current form. The process essentially involves putting money into trees – be they natural forest or part of a managed plantation – and trusting that the value of those trees will increase as they grow into fully mature plants that can be sold for their wood.
These investments are usually seen as a long-term process, purely because of the time it takes for the asset to mature, in both the financial and physical sense of the word. Investors are waiting for their money to grow.
As a result, forestry is often an alternative asset chosen by large institutional investors, such as pension funds, to help diversify a broader portfolio with a slowly appreciating asset that isn’t tied to the the traditional financial markets. But savvy individual investors are becoming increasingly aware of its benefits.
Low Risk, High Return
While the long-term nature of forestry makes it problematic for some investors, for most this inconvenience is outweighed by the fact that it offers relatively high returns for the low level of risk it entails.
Increases are made as biological growth occurs and the class itself moves up; this biological transformation is what sets forestry investment apart from other assets. Where risk is an issue in forestry is its dependence on timber and land price appreciation for returns. But even these areas can be considered comparatively low risk given the increasing global population and demand for housing, construction and associated materials.
Natural disasters or other events that may destroy the land or the trees themselves are generally seen as more of a problem. When funds are spread across numerous different managed plantations, there is a risk that any large scale destruction of land or trees could dampen returns on the asset class as a whole.
Excuse our pun, but the number of opportunities in forestry investment is growing exponentially as governments, businesses and individuals realise the value of investing in forestry.
Sustainable investments are particularly popular at the moment due to the fact that they offer an environmental and moral investment for investors alongside the proposed financial returns.
As more and more businesses pledge to improve their supply chain and focus on sustainability, it seems inevitable that the trend and demand for sustainable materials, such as timber, will increase. Forestry investment is also being used as a direct investment option for businesses who want to be seen to be investing ‘green’.