Forestry Investments - Past Performance and Investment Options

Investors searching to diversify their portfolios and insure their wealth against the ravages of volatility in regular markets, will most likely have come across a range forestry investments, promising to produce superior inflation-adjusted and threat-adjusted returns for the long-term investor.

But how have timber investments performed? And how does the smaller investor participate in this exciting alternative investment asset class?

Firstly let's appear at the past efficiency of forestry investments, as measured by 1 of the principal timber investment indices, the NCREIF Timberland Index according to this fundamental measure of investment returns in the sector, this asset class outperformed the S&P500 by some 37 per cent in the 20 years in between 1987 and 2007. When stocks delivered average annual returns of 11.five per cent, forestry investments returned 15.8 per cent.

At the identical time, returns from investing in timberland and woodlands have been verified to display a a lot lower volatility, an attractive characteristic for today's investor.

Previously, the majority of investment returns from forestry investments have been mopped up by larger, institutional investors such as pension funds, insurance corporations and university endowments, who have collectively placed more than $40 billion into timber investments in the past decade.

So on to the second question how do smaller investors participate in this kind of alternative investment?

According to a study by Professor John Caulfield of the University of Georgia, returns from forestry investments are 3-fold

  1. An boost in timber volume (biological growth of trees), which accounts for some 61 per cent of return on investment.
  2. Land value appreciation, accounting for only 6 per cent of future returns.
  3. Boost in timber costs per unit, delivering the final 33 per cent of investment returns for timber land owners.

So the top way to harness the performance of timber investments is to take ownership of trees, either directly, or via one of the array of forestry investment funds or other structures.

Timber REITs

1 way for smaller investor to participate in timber investments is via a Genuine Estate Investment Trust (REIT). These investment structures are like funds, in that investors can buy and sell shares in the trust on an exchange, the REIT acquires and manages timber investment properties, but in contrast to regular organisations must spend out 90 per cent of their earnings to investors by means of dividends.

Some examples of Timber REITs are:

Plum Creek Timber is the largest private owner of timberland in the U.S. and the largest timber REIT with a market cap of about $5.6 billion, numerous investors have chosen this as their route into forestry investments.

Potlatch is also a timber investment REIT while

Rayonier generates about a 30 per cent of its REIT earnings from timber.

Weyerhaeuser has disposed of its paper and packaging organizations and will convert to a REIT by year end.

The Wells Timberland REIT is not publicly listed but could be out there for purchase through Wells Real Estate Funds.

Another way for smaller investors to add forestry investments to their portfolios is to buy Exchange Traded Funds that attempt to track the performance of timber returns. This is less direct than owing timberland, or investing in a timber REIT, as the ETF may also invest in shares in businesses involved in the timber provide chain which includes processors and distributors. This implies that investing in forestry through ETFs exposes the investor to some of the volatility of equity markets.

The Guggenheim Timber ETF owns about 25 stocks and REITs involved in the international timber and paper products market with a 30% weighting to U.S. providers.

The S&P International Timber & Forestry Index Fund holds 23 securities and is 47 per cent invested in the U.S.

Timber Investment Management Organisations (TIMO)

Those with far more capital to spare can participate in forestry investments by means of TIMOs, although the majority of these investment specialists need a minimum investment of $1 million to $five million and a commitment to tie up funds for up to 15 years. TIMOs essentially trade timber land assets, acquiring suitable properties, managing them to maximise returns for investors, the disposing of them and distributing profits to shareholders.

A number of specialists believe that the active management style of TIMOs ensures that they can be much more reactive to market conditions than REITs, and therefore don't tend to fall and rise in line with the marketplace quite as considerably.

Direct Forestry Investments

Those with access to sufficient capital and the proper professional advice can invest in physical properties. Commercial timber plantations are complex operations that call for skill, understanding and expertise to manage successfully and maximise returns whilst lowering threat.

For armchair investors, or those with much less capital to spare, many organizations give investors the chance to acquire or lease a little portion or plot within a bigger, professionally managed timber plantation. Investors normally take ownership of their plot and trees through leasehold, whilst the timber investment enterprise plants, manages and commonly harvest the trees on behalf of the investor.

Selections for investors range from species to species and region to region, with present opportunities in Brazil, Panama, Costa Rica, Germany, Nicaragua and other, more exotic locations like Fiji.

Investors really should be wary as lots of of these direct are frontloaded with huge commissions for salesmen and promoters, with countless offering 'agents' up to 30 per cent commission for the sale of plots to investors, and in a number of instances, no due diligence even exits.

In some situations, the Author has noticed forestry investment plots in Brazil packaged and sold to investors for over £100,000 per hectare. Investor will need to seek suggestions from an independent consultant with knowledge of this alternative investment asset class, and who is able to present a total suite of due diligence material, including an independent valuation of the forestry investment property on supply.


Investors pick out forestry investments due to their effect as an inflation hedge, and their capacity to generate non-correlated return on investment in the lengthy-term.

Performance of the asset class is driven by demand for timber, weighed against international supplies, and in the long-term we are making use of timber at a faster pace than we can grow it, producing timber investments an appealing asset class for the investor looking for stable, lengthy-term capital appreciation inside their investment portfolio.

Investors seeking into which type of forestry investment is appropriate for them should consult an adviser that can demonstrate knowledge and expertise within the sector.