18 Mar 2011
What is unique about timber as a commodity that makes it such a sound investment opportunity?
Timberland investments have outperformed any other asset class regarding return and volatility over the past 60 years. They performed better than the S&P 500, real estate, bonds or gold and behaved better in any of the crises over this period.
The growth in woodland’s value is largely independent of any macro- or micro- economic situation. During the last couple of decades world nominal timber prices developed steadily just above inflation, which makes timber investments a perfect inflation hedge.
The “secret” of woodland as an asset class, however, lies in natural growth: Apart from the steady growth of the real price for timber, trees do not only grow biologically and steadily in volume, but their increased volume additionally jumps gradually into higher dimension- based value classes. The same volume of small dimension timber is cheaper than of big dimension timber. For example, if you store whiskey many years it may “jump” into higher value classes, but after 60 years it will still be the same volume. If you raise cattle, they may become more in volume but won´t turn into cows. If you invest into gold you will still have the same ounce and it will not have turned eventually into platinum. This combination of natural growth in both volume and value class makes timberland a unique asset class.
Should prices be weak in a given year, timber harvests can be postponed without loosing any money. In fact the opposite is true; trees will just continue to grow in volume and value exponentially.
Timberland is a long-term investment. Are you sure that wood will still be in high demand in 25 years time, for example?
There are three factors: The growth of the world’s population, wood as a renewable resource and emerging markets. The consumption of wood is so basically connected to human life that during the last 100 years the global demand for wood grew in parallel to the world’s population. As the global population continues to grow, there is no doubt that wood will play an even bigger role in our life in the coming years.
Wood is a renewable material and is increasingly replacing other materials like plastics, stone or aluminium and is a highly calorific biomass. Housing booms in China and India – the largest countries in the world – will continue to create a huge demand for flooring, windows, doors and furniture. China is already the biggest importer of wood in the world and India is the biggest teak importer.
There are few industries where you can predict future supply and demand as accurately as on the timber market. We even know which volumes of which species will compete with you in the future, because every tree that can compete with your trees in 25 years must already have been planted.
What about physical risks to investment, such as fire and wind?
Risk assessment is one of our core services. There are a lot more risks than fire and wind we routinely have to consider: Various botanical risks, market risks, cost risks, and so on. For all of these issues we use country rankings of renowned institutions and local empirical data. The risk of fire is generally overstated: A tropical forest is extremely difficult to set on fire. In well-maintained plantations, the risk of fire is below 0.1 percent. Wind is a bigger danger: Of course we wouldn’t recommend a project in a hurricane zone, but due to climate change there seem to be more heavy storms in areas where previously the risk was negligible. Insurance is nevertheless available.
What does ‘capturing CO2 third parties may have created’ really mean?
There are three means of long term CO2 capture: In the oceans, in the soil and in trees, the latter being the only one we can really influence. All plants photosynthesise, absorbing CO2 and using it to grow. However most plants are subject to seasonal growth and when they decay in winter, they re-release most of that CO2. Only trees sequester the carbon over a longer period, e.g. poplars used for biomass grow and capture CO2 continuously for five years. Precious woods mature over 20 – 30 years and will spend roughly the same amount of time as furniture or flooring.
Timber plantations are replanted after harvest, permanently removing the captured CO2 from the atmosphere. All other investments into alternative energy, just work to avoid producing additional CO2, only timber investments remove it.
So as an investment opportunity, timber ticks the boxes on sustainability and ethics. What’s to stop fund managers getting involved immediately?
Timber has long been considered an old fashioned, unsophisticated investment. However, people are increasingly aware that this low-to-moderate risk asset class is outperforming more creative assets.
Those who are hesitant have three main concerns: Some are cautious because they don’t have forestry or timber experience. Other institutional investors are not allowed to invest directly. The third hurdle is that timberland investments are an illiquid long-term investment; because trees need years to grow, a timberland investment is by nature not a short-term operation. But there is a secondary market where woodlands and timber plantations can be sold and purchased. While conventional projects last 20 to 30 years, there are also projects with a projected lifetime of 5–15 years based on purchasing semi-mature plantations. One of our clients has even launched a fund based on a one-year project that still features very attractive returns.
How can EccoWood maximise timber investment opportunities, particularly for groups with little knowledge of forestry or experience in the international timber market?
Our intention is not to sell any project to anybody. We tailor timber investment projects between €3m and €300m to the needs and priorities of our clients. We look worldwide for the best opportunities, establish and manage the projects, so all our clients need to do is read our reports.
Specialised knowledge is essential to maximise timber investment opportunities and minimize risk. Climatic analysis and disease detection are some of the key issues we consider when selecting species and locations. Since we work on a success fee basis, we put ourselves in the same boat as the investor.
Beside this service as technical asset manager, we maintain and harvest forests and timber plantations in a long-term partnership, sometimes for up to 30 years. We also offer consultancy services for suggested or existing timber ventures worldwide.