Forestry: Slow Growth Market
Source: I&PE Real Estate. January/February 2016 (Magazine). Author: Christopher O’Dea
Institutional investors are heading for the trees as they desperately seek alternative sources of income. The forestry and timberland markets are ripe for picking, writes Christopher O’Dea reports
If money really does not grow on trees, someone forgot to tell the global pension fund community. Around the world, institutional investors’ appetite for timberland is rising, consultants are advising pension funds on how to add more timberland to their portfolios – and how to identify suitable strategies and managers – and the timber industry is adapting to the ESG and stewarding requirements of institutional capital.
The growth in the market reflects underlying demand for wood and forest products around the world, in particular from China, where consumption of a wide range of timber and products continued to increase despite the country’s economic slowdown. Industry participants say there was perhaps $1bn (€0.9bn) of institutional capital allocated to timber about a decade ago. While the next few years are likely to see smaller investment managers offering a wider range of timber and forest-product strategies, timber remains a fairly concentrated market where scale matters.
The top 30 timber investment management organisations (TIMOs) have approximately $57bn of assets under management between them, not including real estate investment trusts (REITs), according to RISI, a forestland research and consulting firm based in Boston. The five largest companies account for more than 54% of that total, and the 10 largest TIMOs account for roughly 76% of total assets.
Most timberland investment is focused on a handful of developed markets, with between 80% and 90% of capital targeting the US, Canada, Australia and New Zealand, according to the 2015-2019 Timberland Investment Outlook from New Forest, a Sydney-based forest investment firm. But investors are increasingly looking at emerging and semi-mature forestland in Latin America, Asia, Africa and Europe, says New Forest.
In the UK, for example, timber investing had a banner year, with a record £151m (€199m) of productive forests trading last year as the sector “becomes an increasingly mainstream investment”, according to the annual UK Forest Market Report from woodland manager Tilhill Forestry and forest surveyor John Clegg & Co. Timber production in the UK also set a record, as forest operators took advantage of the highest prices for standing timber since 1998. High timber prices have contributed to the continued increase in average timberland property prices as well, the report says, which has helped the average annual return from UK forestry reach 18.8% over the past decade, according to the IPD UK Annual Forestry index.
The NCREIF Timberland Fund & Separate Account index posted a 0.4% gross return in the quarter ended 30 September 2015, for a gross return of 9.29% in the prior year and 9.76% over the prior three years. The index, which tracks 102 accounts totalling $17.5bn in assets run by 10 managers, currently illustrates the performance of the US market – NCREIF requires funds and accounts to have at least 95% of assets invested in US timber, timberland, timber leases, deeds and cutting rights. NCREIF plans new indices for other regions.
Those returns highlight the attraction of commercial forests for investors with long-term commitments, such as pension funds. With interest rates at or near historic lows, the asset class offers a total return made up of land ownership and potential value gains, and real income growth from crop harvests that feed timber processing industries’ demands for raw material in the form of raw timber and intermediate forest products such as wood chips.
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