Investors twig timber's diversified returns

The TIR Europe Forestry Fund from GBP1.5 billion Timberland Investment Resources Europe LLP has executed a first close with an initial USD74 million of committed capital.

The investors were drawn from a diverse, mostly European group of limited partners, the firm says, including public and private pension plans, insurance companies and family offices. 

The fund is targeting 8-10 per cent returns with 3 per cent annual distributions. Managing partner GianPaolo Potsios says: “We are excited to be able to offer European institutional investors access to an asset class that is well established amongst US investors in a time where the world economy continues on its uncertain path. Real assets such as timberland have a compelling role to play in an investor’s portfolio given the bond-like characteristics with a solid source of alternative yield.”

Fellow managing partner, Hugh Humfrey, says: “For our new investors, we will continue to weight on our over two decades of experience in managing timberland investments and the network created to source the best opportunities, whilst pursuing the highest environmental stewardship and expertise in managing the forests. We have our in-house economic and biometric research methodologies to inform and guide our investment decision-making process and remain boots on the ground foresters while assisting our investors achieve their portfolio objectives.”

Timber as an investment is most often measured by the Timberland Index, published by the National Council of Real Estate Investment Fiduciaries, or NCREIF. Returns from timberland investments – as measured by that index – have been superior to the returns from other commonly held asset classes, such as UK Equities & Bonds, Gold, Commodities and UK Commercial Property and achieved without the trade-off of higher risk, the firm says.

Timberland also offers diversification, according to the firm. “Commercial timberland, by its nature, is affected by a different set of macroeconomic and market factors than other asset classes. As a result, there will be limited correlation between returns from timberland and other asset classes such as equities, bonds and property.”

One of the unique advantages of timber is that, as an asset, it literally grows, with trees growing in volume, size and ultimately into increasingly higher-valued products. The firm gives an example, drawn from the south of the US where individual trees begin as lower-value pulpwood, grow into a combination pulpwood/saw timber tree (9 to 12 inches in diameter), normally referred to in the timber trade as ‘chip-and-saw’, and then into saw timber (trees that are generally greater than 12 inches in diameter and of a high quality) for construction products.

The firm writes that as a tree grows into these larger and higher product classes, the monetary value of the tree increases as well. “The negative impact of the time value of money and the risk of negative returns can be offset by the increasing volume and value of the asset. In short, the effect on investment return by possible downward movement in timber prices is mitigated by volume growth; the effect of upward price movement is compounded by volume growth,” the firm writes.

In addition, over the life of an investment, timber continues to grow although at a slower rate as trees mature. This allows the investor to ‘warehouse’ timber ‘on the stump,’ giving the investor greater flexibility to harvest when prices are high and delay sales if prices are weak.

Timberland portfolios can be structured to meet different objectives, with higher cash flows achieved by buying more mature properties; if long-term gains are more important, then this goal can be achieved by acquiring young plantations, with high growth rates and enhancing the benefits of biological growth through intensive management techniques, the firm writes.

The firm also suggests that timberland can be viewed as a specialised long term bond. “A forest will generate cash each year as timber is harvested. This harvest can be modelled and forecast with a good degree of accuracy over many years, even decades and since timber growth is not effected by movements in financial markets, a forest investment can be structured to behave in many respects like a long-term bond.”

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