Timberland investment has traditionally been the preserve of the private, non-industrial landowner, accounting for a staggering $150 billion globally. However over the last 20 years, institutional investors have discovered this ‘perfect’ asset and now own around $35 billion worth of timberland globally, in a combination of over 100 private pension, foundation, and endowment funds. Of that around $25 billion is invested in the United States, which represents both the world’s largest producer and user of timber. Pension funds such as Calpers, led the way in the 1980s, however it was the big university endowment funds such as Harvard and Yale that saw the true potential and invested heavily in a move to diversify their portfolios globally. Last year the Harvard Endowment Fund invested $500m in forestry and carbon credits in New Zealand.
So what makes timber such a popular asset with institutions and what are the fundamentals driving this perfect asset?
Timber can be classified as a specialised form of long-term bond. A forest that holds mature timber will generate cash each year through the harvest and sale of timber. These harvests can be modeled and forecasted with a reasonable degree of accuracy over many years. Since timber growth and subsequent harvests are scarcely affected by the movement of financial markets, forest investment can be structured to act and behave in many respects like a long-term bond.
Most view “timberland” as an investment in real estate. While traditional commercial real estate generates income from leasing, timberland derives its primary income from the sale of timber and more recently from carbon credits. However its tax that has been the major driver of forestry investment in the UK; if held for 2 or more years the forestry land can be passed on to family members with no inheritance tax. Timber harvest is also exempt from income tax making this especially popular as a wealth protection asset.