In the most recent issue of the Alternative Investment Analyst Review, there is an article regarding investments in a specific sector of real estate named Timberland Investing in the US: What You Need to Know Now. It was written by three timberland asset managers: Timothy Corriero, Managing Director at FIA Timber Partners; Tom Healey, also Managing Director at FIA Timber Partners and Scott Bond, Vice President and Director of Marketing and Client Relations at Forest Investment Associates. They studied several topics on the state of timberland investing.
Historical returns can be split into 4 phases. From the 1987 to 1998, returns ranged from 10% to 37% annually. The asset class was new and there was little investor interest. As was detailed in a separate post, the opportunity was presented to investors when corporations started selling their land in order to concentrate on their core businesses. From 1999 to 2003, returns ranged from 4% to 10% due to the recession of 2001 even though timberland investment management companies were created. From 2003 to 2008, returns ranged from 8% to 20% as the real estate bubble caused land values to rise. Corporations sold their land at what we now would call inflated prices. After 2008, returns ranged from 1% to 8%. This coincides with the crash in the housing market which lowered the demand for timber.
These returns were further analyzed against inflation as measured by the Consumer Price Index over 10 year investment periods. They always were higher. The same cannot be said of the returns of equities and bonds. Equities lagged during the credit crisis and in the 1970s. Bond returns were lower in the 1980s.
Timber is split geographically by product: Pacific Northwest and Southern. The Pacific Northwest has been performing better in 2013. This is due to its proximity to Chinese demand and lowered competition from Canada. Canadian production has been cut in half by a pine beetle epidemic in British Columbia.
The future for timberland investing in the Pacific Northwest is promising. The recent recovery in the housing market will cause increased demand for homebuilding, a main consumer of wood. That, combined with the loss of Canadian wood, should cause timber and timberland land prices to rise. The improved returns and ability to hedge against inflation make this an attractive asset.
