What Makes this Asset Class
Institutional investors have been investing in forestry assets for decades. Timber, like most commodities, is a resource in diminishing supply, and yet demand continues to rise due to global population and economic growth. Native forestry stocks have been reduced and are increasingly protected, so only sustainably managed forestry assets can meet the strong demand for timber related products. This demand-supply gap will give forestry plantation managers pricing power long into the future, and has helped forestry become a widely accepted asset class for investors.
Low Correlation to
Traditional Investment Instruments
The “Global Timber Investments and Trends” report by the New Zealand Journal of Forestry Science has stated that there is increased interest in forestry assets that is being driven by their behaviour as an asset, with stable returns and a low correlation to financial assets such as equities, fixed income and real estate. The long-term correlation between equities and forestry assets, for example, is close to zero, meaning, that the return characteristics of forestry assets are not related to equity market volatility.
As identified in the “Timberland: The Natural Alternative” report by McGraw Hill, trees and associated products are the only assets that grow by themselves – naturally, and independently of any economic situation. Timber company shares, therefore, and timber product values, tend to perform best when stocks and bonds are generally depressed. The harvesting of trees can be postponed if need be, with the owner safe in the knowledge that the assets are gaining in value. Whereas, other commodity assets such as mines or oil wells, will not be able compensate for the loss of interest when income is not being generated.
Forestry ownership involves owning a tangible, physical asset that retains its value in all market conditions. Although the value of timber can depreciate, the biological tree growth tends to offset any depreciation in prices.
Moreover, with owners having options when choosing the time period to harvest (e.g. harvesting can take place when prices are high), the timber value can be stored ‘on-the-stump’ in periods of depressed demand.
The Value of Land
in Asia and Africa
According to the ‘Global Farmland Survey and Outlook’ report by Informa Economics, land prices in the USA, Canada, Europe, Australia and New Zealand have risen strongly in recent years, with many forestry projects in these countries ‘overbought’, thereby decreasing forward-looking return potential. In contrast, Asian emerging markets such as Sri Lanka and Thailand, and African markets such as Kenya, offer better land price value and lower labour costs while still benefiting from the scientific and technological advances that ensure future forestry yield enhancement. Asia Plantation Capital’s forestry assets are also ideally located to supply China and India – the two most significant growth markets for forestry products.
The United Nations Food and Agriculture Organisation has estimated that global consumption of wood and wood related products would rise more than 50% by 2030. The current supply of timber from sustainable sources is insufficient to meet existing demand, let alone future demand that is expected to grow significantly.
Interestingly, Phouthone Sophathilath in his report titled “Assessment of the Contribution of Forestry to Poverty Alleviation in Lao People’s Democratic Republic” found that agarwood and teak were regarded as the two species most attractive to institutional and professional forestry investors due to the high return potential relative to risk and the probability of suppliers’ pricing power.