Preparing for timber falls

Timber investments are becoming more popular as investors look for alternative sources of returns following extreme volatility in traditional markets.

Timber appears not only to be uncorrelated to other asset classes, but it also acts as a hedge against rising inflation due to the close correlation between timber prices and overall prices in the economy.

However, when investing in timber, through whatever type of vehicle, investors should consider the returns they are aiming for, the risks they will tolerate and what end market suits their needs. Timber, according to FIM Services, has essentially seven main markets: construction, packaging, pallets, fencing, panel board, paper and biomass for energy and heat.

Not only do you need to consider the eventual use of the wood, you also need to decide what region you want to invest in, as data from the Earth Policy Institute suggests that in 2010 forest covered 4.03bn hectares of the world – approximately 30 per cent of the total land area.

Commercial woods

Hugh Humfrey, partner at Timberland Investment Resources (TIR) Europe, says: “As an investor, we focus on commercial woods, those that have a genuine commercial market and that can be both softwoods and hardwoods. [These] can come from anywhere in the world, from plantations or from natural forests, so there is a huge opportunity.

“It depends on what the investor’s risk/return goals are, because if they’re lower – single figure returns – they can get those from the developed markets such as the US. If they’re looking for higher returns, then they’ve got to move into some of the more opportunistic regions, such as central Europe, some parts of South America and south-east Asia. The higher up the return spectrum you move, the less likelihood there is of having developed infrastructure, on-the-ground skills, the abilities to access markets and the abilities to move wood.”

Liane Luke, chief timber officer of the Phaunos Timber fund, says: “Probably the most readily available investment woods are pine, fir, and eucalyptus. Teak is becoming more available in plantations in the past 10 years, and poplar as well. It’s all about delivering to the market what it wants, and these woods are popular investments because they have many commercial applications and can be grown readily in plantations.

“Other popular investment hardwoods, such as mahogany, maple, and oak, are typically grown in natural forests, and although they may have more narrowly defined target markets, can be very valuable.”

Ms Luke also points out another issue to consider is the rotation length of the species. Some trees can take 200 years to grow to maturity, others are harvestable in seven years, or even less.

“It depends on the species, the location and the intended product application. The amount of time it takes to bring the tree to harvest is factored into the sales price by your manager.”