Timberland

Timberland, in the investment sense, is forest land owned primarily to generate financial returns from growing and harvesting trees. Its returns come from three main sources: the biological growth of the trees, which adds volume regardless of market conditions; changes in the price of timber; and changes in the value of the underlying land. Increasingly, owners also earn income from carbon credits, conservation easements and other payments for environmental services.

Timberland is classified as a real asset and an alternative investment. It is held mainly by pension funds, university endowments, insurers, sovereign wealth funds and wealthy families, as well as by publicly listed timber companies.

Biological growth

Trees add wood volume each year, and as they grow their value per unit rises because larger logs can be sold as sawtimber rather than lower-value pulpwood. This growth continues during recessions and market downturns, so an owner can defer harvesting when prices are low and let the trees "store" value on the stump. Biological growth is the feature that most distinguishes timberland from other real assets and is usually its largest source of return over long periods.

Timber prices

Harvest revenue depends on prices for logs and pulpwood, which are driven by housing construction, paper and packaging demand, export markets and the supply of standing timber. Prices are regional, because logs are expensive to transport, and can be volatile.

Land value

Forest land can appreciate, especially where it may be converted to higher-value uses such as residential development or recreation. Some owners sell parcels to these buyers as part of their strategy.

Carbon and environmental revenue

Forests absorb carbon dioxide, and owners can earn carbon credits by managing land to store more carbon than a baseline, for example by lengthening harvest rotations. Credits may be sold in voluntary markets or in compliance programs where these accept forest offsets. The integrity of forest carbon credits has been widely debated, and revenue from them depends on registry standards, verification and buyer demand.

• Direct ownership: large investors buy forests outright, often through a special purpose vehicle, and hire foresters to manage them.
• Timberland investment management organizations (TIMOs): specialist managers that acquire and run forests for institutional clients through separate accounts or pooled funds, similar in structure to private equity funds.
• Timber REITs: in the United States, several large forest owners, such as Weyerhaeuser, Rayonier and PotlatchDeltic, are organized as real estate investment trusts listed on stock exchanges.
• Funds: some exchange-traded funds hold timber and forest-products companies, though these behave more like equities than like forest land.

Fund structures used by international investors are often established in jurisdictions offering tax neutrality, so that each investor is taxed at home.

Investors cite several reasons for holding timberland. Its returns have historically shown low correlation with stocks and bonds, which supports diversification. It has been regarded as a partial hedge against inflation, since land and timber prices tend to rise with the general price level. Its long investment horizon matches the liabilities of pension funds and endowments. It is also attractive to investors seeking environmental and climate-related exposure. For a family office or ultra-high-net-worth investor, timberland can play a role similar to farmland or allocated gold as a tangible store of value.

Example

An investor buys 10,000 acres of pine plantation for $25 million. Over a year the trees grow by about 4% in volume, and as some stands move into the sawtimber class their value rises a further 1%. Timber prices are flat and land values rise 1%. Harvest income, net of management costs, equals 3% of the purchase price. The investor's total return is roughly 4% + 1% + 1% + 3%, about 9%, before taxes and fees, even though timber prices did not change. In a weak market, the investor could harvest less and let the growth component accumulate.

• Illiquidity: forest properties take months to sell, and fund interests may be locked up for ten years or more.
• Natural hazards: fire, storms, drought, pests and disease can destroy standing timber, and insurance is limited or expensive.
• Market concentration: local log prices depend on a small number of nearby mills.
• Valuation: appraisals rely on assumptions about growth, prices and interest rates, so reported returns can be smoothed.
• Regulatory and reputational risk: forestry rules, land-use restrictions and scrutiny of carbon claims can affect value.
• Currency risk: investors buying forests abroad, for example in New Zealand, Chile or Brazil, take on exchange-rate exposure unless they hedge it or have a natural hedge.