Forestry Investments – A Non-Correlated Asset Class

Investing is forestry has been used as a portfolio diversification and optimisation tool by wealthy investors for many years, and now many smaller investors are seeking alternative assets capable which generate returns that do not rely on the performance of volatile financial markets. In fact many large institutional investors such as pension funds, university endowments and specialist hedge funds are acquiring productive natural resource real estate such as farms and timber plantations in an effort to reduce volatility and align portfolio growth with increasing trends in demand for commodities from an ever-increasing global population. Social and economic growth in China alone is likely to see demand for raw materials such as food, timber and energy increase exponentially as millions of people move from rural areas into urbanised cities and require greater inputs of food, energy and raw materials for infrastructure.

Let’s look at some of the key reasons that an investor might consider forestry as part of a diversified portfolio of investments.

Direct forestry investments involve the acquisition of land assets, either through freehold or leasehold title. This land may be an existing forest stocked with trees of various species suitable for harvesting in order to sell as constructions timber, pulp of paper and other associated wood products, or it might be vacant land with suitable topography, infrastructure, local climate and soil quality ideal for the establishment of a new forest.

Trees are managed by an experienced forest manager who will arrange the management, harvesting and replanting of trees at the relevant point in the forest life-cycle, as well as the processing of raw timber into more valuable downstream products such as sawn lumber which commands a higher price in the open market. The commercial interests are taken care of by an experienced timber business professional with the right local contacts required in order to sell the harvested timber. The owner of the property benefits from the revenue created from the sale of the timber.

This asset class is considered a non-correlated investment because returns are not derived from financial markets; this means investors can reduce their exposure to volatile equities and reduce the likelihood of sever financial losses should the markets fall suddenly as witnessed in the most recent financial crisis.

In fact the financial return to an investment in productive timber properties is derived mostly from the biological growth of the tree into valuable timber. Each year trees continue to grow in size and therefore command a higher price in the timber markets regardless of whether financial markets or the global economy is rising or falling. What’s more, the price per unit of timber also increases as demand for sustainably sourced timber from a growing global population also increases, creating a two-pronged capital growth strategy, and should timber prices fall (which they do if demand is low), investor may simply leave their trees to grow for another year, letting the biological growth offset any price depreciation.

In summary, it is right to point out there are of course risks to forestry investment, but these risks are quite different to the risks associated with traditional financial assets. Timber properties are physical tangible land assets that will never depreciate to nothing, and continue to grow in size and value whatever the economic weather, so might make for an interesting tool for investors concerned about the state of the global economic recovery and seeking an alternative investment that offers a high degree of capital security and superior return on investment.

Prospective Investors are advised to seek the counsel of an experienced professional real estate investment consultant with a track record of sourcing and delivering successful investment projects in the forestry sector in order to properly understand the risks and opportunities associated with this niche asset class.

Brittney Herbert

Next Post

Owner Operator Insurance - Non-Trucking, Bobtail & Unladen Liability Definitions and Impact

Sat Jan 15 , 2022
As in any business model, Motor Carriers (MC) utilizing Owner Operators (OO) enjoy certain benefits while also assuming additional risks. One such risk is the potential “uninsured” exposure of the OO while not in a “business use” capacity for the Motor Carrier. The MC’s Trucking or Commercial Auto Liability (AL) […]

You May Like