When you think about agricultural land, you may not immediately think of timber. But timber is an agricultural product, and along with the land it grows on, is a viable alternative investment with 35 years of strong historical performance.
Globally, investable core timber markets are worth around $344 billion, with the U.S. accounting for approximately $226 billion of that total market. A majority of U.S. forestland is privately owned, with private, public, and institutional ownership distribution varying by region.
Source: USDA, "Forest Resources of the United States, 2017
Institutional investment in timberland is well-established, with historical participation in U.S. timber markets by pension funds, university endowments, private equity, and other large entities for the past 30 to 40 years.
Today, individual investment options remain quite limited, but that’s changing thanks to platforms (like AcreTrader) that facilitate fractional ownership of timber properties.
What Is a Timber Investment?
Like farmland, timberland is considered a real or hard asset (as opposed to a financial asset). Both farmland and timberland investments are, at their most basic, individual parcels of agricultural land, acquired in the marketplace for investment purposes.
A timber investment consists of productive land plus growing trees.
This forest can be natural or planted. The trees can be softwoods—that is, trees with needles such as pine, fir, hemlock, and spruce—or hardwoods, that is, trees with leaves such as oak, maple, and cherry.
Major U.S. regions for timber include the Southeast, the Pacific Northwest, and the Northeast, where soils and climates are suitable for growing crops of trees.
Note: When we refer to a timber investment, we mean the direct ownership and management of individual timberland assets. We assume the investor or entity acquires and holds a timberland parcel directly and the property is actively managed, with harvesting and replanting of trees. (AcreTrader’s investment model allows investors to directly purchase units in the entity that owns the timberland parcel.)
Dig deeper into how timberland investments work in this webinar, presented by Director of Timber Acquisitions Mark Foley on May 17, 2022.
Is Timber a Good Investment?
Timber harvests do not follow the same seasonal pattern of agricultural crops. One large advantage of timberland is the flexibility to harvest more timber when prices are high and store when prices are low. Tree inventory can be “stored on the stump,” where it continues to grow—independently of the business cycle.
Similarly to farmland, timberland has over the last 35 years proven to outperform traditional assets like gold, bonds, and commercial real estate. Investors often look to timberland for:
- Unique characteristics like biological growth and harvest flexibility
- Consistent long term returns
- Lower volatility than traditional asset classes
- Lack of correlation with equities and fixed income assets, as well as alternatives like hedge funds, private equity, and even other types of real estate
- Inflation hedging
The chart below shows timberland’s return performance relative to volatility between 1991 and 2020.
Note: (1) Supplemental information. Please see additional disclosures for further information. Source: NCREIF, Bloomberg, Bankrate, NYU Stern School of Business, Federal Reserve Bank of St. Louis, and AcreTrader calculations. All returns are estimates and assume reinvestment of dividends. Updated data published on 12/20/2021 and is for the period 12/31/1990 - 12/31/2020.
This chart shows timberland’s correlation to other common assets between 1960 and 2021.
Source: NCREIF, Ibbotson Associates
Timber Investment Returns
Historical returns for direct timber investments have been strong, with the National Council of Real Estate Investment Fiduciaries (NCREIF) claiming annualized total returns of 10.74% for its Timberland Index over the past 35 years (since the inception of the index) through Q4 2021.
Timberland investments generate returns for investors through:
- Cash flow derived from harvesting of the trees at opportune times in their development. These events are staggered irregularly throughout trees’ life cycle, with the largest revenue event occurring upon harvest of fully mature trees.
- The ultimate resale of the property based on the value of the trees it holds and the underlying land. Pure land appreciation plays a far smaller role in timberland’s return profile than in that of farmland. In this case, biological growth, or the steady increase of wood volume, makes up the bulk of the total return.
- Non-timber income, e.g. recreational leases, which offer potential for additional income, as timberland typically sits undisturbed most of the time.
Risks of Investing in Timber
As is true of any investment, an investment in timberland does not come without risks. Risks associated with owning timberland may be both economic and environmental.
Economic risks could include:
- price risk due to fluctuations in supply of and demand for lumber and other wood products
- regulatory risk, for example from political or environmental pressures
- illiquidity risk, if there is a lack of potential buyers for the timberland at exit
Volatility in timber prices is largely offset by the constancy of biological growth, which has historically smoothed out returns.
Additionally, there is little carrying cost to holding timber off the market if prices are weak—the trees will just continue to grow until markets improve. (This is often seen as a strategic advantage of direct ownership of the timberland as opposed to investments in forest product companies.)
Environmental risks stem from factors such as:
- age of trees
- wind and storms
- destructive insects and other pathogens
- drought
- fire
Timber Investment Risk Mitigation
Generally, economic risks pose a greater threat to investment returns than environmental, as skilled forest management can mitigate many of the latter. (This includes activities such as brush clearing, selective harvesting, etc.) Several more strategies can be used effectively to manage both types of risk.
These include diversification across:
- tree species
- end use markets (e.g. construction, furniture, packaging, etc.)
- region and country of property ownership
How to Invest in Timber
The direct means to invest in timberland is through outright ownership of the property, but there are several ways investors can get exposure. The best way to invest in timber will depend on the amount of personal involvement you want in your property, as well as your available upfront investment capital.
Some of the more capital-intensive options include individual purchase, managed funds, and separately managed accounts.
A handful of timber-specific REITs and ETFs offer options for retail investors to gain exposure to the asset class, but many limit exposure to timber-specific attributes, such as the ability to harvest when market conditions are favorable. With publicly traded REITs or ETFs comes a more direct correlation to equity markets as well, potentially increasing volatility.
Timber Investment Management
No matter what route you choose, it’s common for third parties to handle the management of timber investment properties, from sourcing, planting, and harvesting trees to tax management and distribution of returns.
Professional investment management can benefit a passive investor by providing two important timing options:
- Entry/exit option, which relates to the investment manager’s ability to use market conditions to their advantage when entering and exiting an investment.
- Harvest option, allowing the investment manager to observe market conditions and harvest trees when timber prices are attractive, thus positively impacting the overall rate of return.
Conclusion
Trees’ unique attributes as an agricultural product—for example, long life cycles, biological growth, and harvest flexibility—set timberland apart as an investment. Larger investors have long turned to timber for consistent returns, diversification away from historically more volatile assets, and powerful inflation hedging.
Investors may want to consider timberland as an alternative real asset alongside farmland to aid in a long-term portfolio diversification strategy. As with other land investments, investing in timberland contains inherent risks so we encourage all investors to consult with their financial and tax advisors prior to investing.
Could it be time for you to think about adding timber to your portfolio? Create your AcreTrader account today to be notified about upcoming timber and farmland investment offerings, and please reach out to us with questions about investing in timber with AcreTrader.
Mark Foley has 20 years experience in real asset consultancy, direct investments, and asset management, including seven years with U.S. Trust as SVP acquiring timberland for ultra-high-net-worth-investors. There he oversaw $720M raised for U.S. Trust and Merrill clients. Mark also previously spent four years as Managing Director CIO at Domain Timber Advisors, where he was responsible for strategy development, financial and performance oversight, and portfolio monitoring, as well as eight years as a timber analyst with GMO and Jeremy Grantham in Boston, where he oversaw $2.5B in capital raised and $650M in dispositions on behalf of institutional investors.