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, 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 gives 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 report stated that there is increased interest in forestry assets that is being driven by its behaviour as an asset, with stable returns and 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 the return characteristics of forestry assets is not related to equity market volatility.
As identified in the “Timberland: The Natural Alternative” report by McGraw Hill return characteristics on timberland have been attractive. In the US, timberland has yielded 15.3% (net) between 1987 and 2006; while other common indices (Bond Index, GC Commodity Index, S&P 500 Index) have been in the 8% to 13% per annum range over the same period.
Also stated in the same report, 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. Even timber prices are less affected by economic downturns than most other assets. The harvesting of trees can be postponed, with the owner safe in the knowledge that the assets are gaining in value. Whereas, for example, even a production adjusting copper mine or oil well will not be able compensate for the loss of interest when income is not being generated.
As supported by the above sources, 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 the choice in choosing the time period to harvest (e.g. harvest when prices are high), the timber value can be stored ‘on-the-stump’ in periods of depressed demand.
The value of land
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 and many forestry projects in those countries look overbought (decreasing forward-looking return potential). By contrast Asian emerging markets such as Sri Lanka and Thailand offer better land price value and lower labour costs whilst still benefiting from scientific and technological advances ensuring 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 previously estimated that the world consumption of wood and wood related products would rise more than 50% by 2030. Meanwhile, the current supply of timber from sustainable sources is still insufficient to meet demand, thus the long-term industry outlook for timber and forestland assets remains strong as the global demand for wood and paper products continue to exceed supply.
Interestingly, Phouthone Sophathilath in the report “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.