Investing in a Patch of Forest
Many people have dreamed of owning their own patch of forest for financial, recreational, or sentimental reasons. Timberland provides numerous benefits that distinguish it from other investments. Trees grow every year, through wars, recessions, and market crashes. One of the primary advantages of owning timberland is it does not have to be harvested every year, unlike fruits that ripen just once and then have to be picked or row crops that are dependent on commodity prices. Instead, forests grow on the stump for decades. Investors retain profits on those trees and wait for a more profitable time to sell timber – most likely, when timber prices are in their favor.
Timber… Sustainable & Renewable
Timber is a sustainable, renewable resource. It can be replanted and re-harvested over and over again. There are many different timber types and uses, and investment returns vary by geography and the economic conditions associated with the end products. Softwoods are mostly used in home construction, and thus their returns are more tied to the housing market's performance. Hardwoods are a smaller component of wood production and consumption in the United States, with uses in consumer applications such as furniture, cabinets, flooring, and industrial applications such as truck beds, railroad ties, and pallets.
Positive Long Term Investment Opportunity
In today’s uncertain economic environment, the supply and demand fundamentals of timberland are positive for those with long investment horizons. An expanding global population and rising standard of living will continue to increase demand on a finite supply of timberland. The U.S. is currently the largest consumer of wood products, closely followed by China, which is the largest importer of timber in the world. China is the destination for more than half of the timber shipped anywhere in the world, and that amount represents only 50% of the country’s wood consumption. Interestingly, Swedish furniture seller IKEA is the sole consumer of about 1% of the world’s wood products.
Favorable Attributes of Timberland Investments
As an investment, timber has several favorable attributes. First, it's a hedge against inflation. Dr. Jack Lutz of Forest Research Group notes that, “U.S. timberland returns appear to lead the U.S. Consumer Price Index by a year and those returns are highly positively correlated with inflation. Timberland is an asset that will preserve capital in the face of rising consumer prices.” Second, timber returns are uncorrelated to the stock market and have outperformed both the stock and bond markets from 1971-2010, with annual returns of over 14%. Timber performs especially well in bear markets. During the Great Depression, timber gained 233% as the price of stocks fell more than 70%. The asset class also significantly outperformed the S&P 500 during the three largest downturns of the 20th century (1911-20, 1929-41, and 1966-81). Though timber has seen some sluggish years lately, the long term trends are positive. The annual total return of the NCREIF Timberland Index in 2017 was 3.63%, up from 2.59% the prior year.
3 Components of Returns
Timber returns consists of three components: annual land value increase (about 1% a year), biologic growth of the trees (6-8% annually), and a the price of the actual tree, or stumpage, which has been about 3% on average over the last century. Timber returns require patience; however, generally a timber investment takes two to three decades to mature. Cash flows are sparse during that time frame, with possibly two thinnings and a large harvest at the end (of course the trees can be replanted). Some timber owners make enough each year from ancillary income such as hunting leases, billboards, or cell tower leases to pay off their property taxes and management fees.
Successful Timber Stand Investing
Like most real estate investments, much of the profit for a timber stand is made in the buy, and the biggest risk when investing in timberland is to pay too much for the property. Solid appraisals and stewardship by a reputable forestry management company are a prerequisite of any successful timberland investment.
Even during the most difficult economic times, trees grow, increasing in both volume and value. Institutional investors and college endowments know that timber is a key component of a balanced portfolio and is well suited for the long-term investor desiring a stable real asset with multiple value propositions. Timber makes an excellent legacy family investment to be passed down from generation to generation.
