As investors have grappled with uncertain markets in recent years, interest in timberland investing has grown dramatically.
Despite its impressive growth and performance, however, timberland remains a somewhat misunderstood investment opportunity. We have covered some of the most common misperceptions about the asset class in the source article.
Let me add two additional ones:
Myth: Plantation forests (those consisting of trees of the same age and species) yield higher returns than forests that are managed in a more natural mixed age/mixed species state.
Reality: Plantation forests typically produce faster growth rates and higher volumes of timber, but these characteristics alone do not translate into higher returns. Timberland investments are usually valued on a discounted cash flow (DCF) basis. This tends to level return expectations across different forest types and investment locations. Local timber and land market conditions have also a considerable impact on LT investment returns. For instance, a forest stocked with trees of varying ages and species may have a component of high quality hardwoods that are in demand for the production of premium furniture. This timber is likely to sell at a higher unit cost than timber grown in a plantation forest that is being managed to produce lower-valued pulpwood. In addition, bare land values are often considerably higher for the natural, mixed age/mixed species forest because of alternative land use pressures, such as conservation, recreation and rural home development.
Myth: The capture of higher and better use (HBU) land values almost always entails conversion of a forest for purposes of development.
Reality: A forest’s value is determined by the context in which it exists. Forests in proximity to growing metropolitan areas often see their underlying land values eclipse their values as timber production assets. In addition, population and commercial expansion tends to be accompanied by increased public pressure to protect lands for conservation and recreation. For timberland investors, it is essential to determine the “HBU” of a forest asset and to structure one’s management approach accordingly. In some cases, it may entail selling some land for development. In others, it may entail working with public agencies or private conservation groups. Regardless of the prevailing “HBU” scenario confronting an investor, the goal is to respond to land-use market demands in a socially and environmentally responsible fashion and to create additional value in the process.
Timberland is an exciting investment sector.but above all requires a timberland manager with proven knowhow, disciplined investment process and genuinely transparent with interests that are aligned with those of the investors.
Source: http://www.glgroup.com/News/Investing-in-Timberland---Perceptions-vs.-Realities-54203.html