GLOBAL - A new report by Watson Wyatt highlights the potential of timberland as an asset class for institutional investors. Timberlands are forested areas that are used to harvest wood.
The report cites a number of advantages to investing in this asset class.
First is “the reasonable stand-alone returns” which the asset class is expected to have in the near future.
Secondly, as with any new asset class, timber will provide a vehicle for investors to broaden further the diversification of the asset class.
The third benefit, which the report cites is the “reasonable chance for active management to produce meaningful results in the more esoteric asset classes.” The report goes on to say that “the off-market nature of many transactions means that it shares some similarity with the world of private equity.”
Lastly, timber “stumpage” prices – the value of standing timber – have offered some protection against equity bear markets.
The most important component of return from timberland as an asset class is biological growth – i.e. as plantations grow so there will be more wood on each plantation, making them more valuable, and the value per unit of wood increases as the trees mature.
Skill in acquisition and management are other key factors.
But as with any asset class there are drawbacks. In addition to the more obvious risks of the demand side where governments may sell off national forests and supply side where substitute products come to market there are a number of physical risks including fire, weather, insects and disease, animal damage and even theft.
Given the typical size of an investment in this kind of asset class – at least initially – investors may choose to invest in timberland real estate investment trusts.
But the report also notes the drawbacks to this option that “while this method does allow for relatively small amounts to be invested in timberland and for greater liquidity, it may in turn destroy one of the sources of return associated with the asset class, namely that associated with an illiquidity premium.”