Capital Markets and Sustainable Forestry - Forest Trends

Section IV
An Overview of Forestland Investment
The acquisition, c o n t rol and management of fore s t s
is fundamental to the forest products industry.
E f f o rts to catalyze development of the sustainabl e
f o re s t ry industry on a significant commercial scale
must include investment in fore s t l a n d ,e i t h e r
t h rough fee title acquisition, l e a s e s , concessions or
other ri g h t s . In order to evaluate these opport u n it
i e s ,it is important to understand the nature of
f o restland inve s t m e n t s ,f o restland distri bution and
ow n e rs h i p, as well as marketplace tre n d s .This section
provides a brief global forestland inve s t m e n t
ove rv i ew and analysis as background for the inve s tment
strategy detailed in Section V I I .
FORESTLAND AS AN ASSET CLASS
Over the last 15 years forestland has been increasingly
recognized in the capital markets as a distinct
asset class, apart from commercial real estate or
integrated forest products companies.There are
several key historic characteristics to forestland as
an investment 14 :
1 . Fo restland is a tangib l e ,l ow - isk r esset.Fo re s t
land value is based not only on market conditions,
but is strongly driven by biolog y.The sheer vo l u m e
growth in the timber during the ow n e rship peri o d
typically accounts for a significant portion of
re t u rn .F u rt h e r, u n l i ke commercial real estate, t i mberland
cannot be “ ove r bu i l t .” In fa c t , high quality
f o restland is only decreasing through deve l o p m e n t -
d riven conve rs i o n .These qualities are sometimes
called the “ b i o l ogical beta.”
The pri m a ry risks associated with forestland are
natural (fire, pests and disease), m a r ket and re g u l at
o ry.These can be mitigated through care f u l
d ive rsification among commercial tree species,
s i t e s ,and re gions and countri e s .T h ey can be furt h e r
mitigated through env i ro n m e n t a l l y - s e n s i t ive and
e c o l ogi c a l l y - k n ow l e d g e a ble forest management.
L o n g - t e rm holds not only enhance re t u rn s
t h rough capturing volume and grade grow t h , bu t
1 4 This discussion is based on nu m e rous studies of U. S. f o re s tl
a n d , including Timberland Inve s t m e n t s, Z i n k h a n ,et al (1992); a n d
T i m b e r l a n d :An Industry, I n vestment and Business Ove rv i e w,
R i n e h a rt (1991).
t h ey can mitigate short - t e rm market fluctuations
t h rough more flexible market timing of harve s t s .
2 . Risk-adjusted e rt
u rns are stro n g. R e a l ,i n f l a t i o n -
adjusted re t u rns from U. S. f o restland inve s t m e n t
1 5
h ave ranged from 8-10 percent on ave r a g e.
(Hoffman 1997. Zinkhan 1997) The elements of
re t u rn are :
a ) The growth ra t e of the tre e s : Young trees can
grow at a ve ry fast rate, which gradually decre a s e s
with time as they approach biological maturi t y.
The actual growth rate will va ry by species and
a g e, r a n ging from 2-15% annu a l l y, with managers
typically targeting 3-4 percent through time.
b ) Value growth as trees mature into higher va l u e
c l a s s e s ,such as the incremental growth from pulpwood
to saw t i m b e r.T h e re f o re, the unit value as
well as the volume is increasing through time.
c ) Real price appreciation for timber “ s t u m p a g e ” 16 h a s
h i s t o rically exceeded inflation.A c ross U. S. s p e c i e s
the average long term real price appreciation has
been approximately 2% on an annualized basis. ( S e e
Figure 8) However, it is important to note that
current m a r ket conditions, a rising from incre a s e d
global competition among pro d u c e rs and ove rc apacity
in pulp supply, a re inhibiting near term pri c e
a p p reciation for most species. E x p e rts are divided as
to long-term fore c a s t s .
d ) A c t i ve management can increase timber grow t h
rates and sustainable vo l u m e s .M a r ket timing and
c a reful merchandising of timber harvests can capture
m a r ket opportunities or avoid tro u g h s .B u y i n g
f o restland in low markets and selling timber in high
ones can significantly increase re t u rn s .
1 5 T h e re can be major fluctuations in forestland re t u rn within a
d e c a d e.The Hancock Timber Resource Gro u p ’s realized a 32%
re t u rn on Pacific Nort h west forestland between 1987 and 1996.
These we re based on buying strongly in that re gion during the
d e p ressed prices of the mid-1980s and selling many pro p e rt i e s
at the peak in the early 1990s, after the national forest timber
supplies we re curtailed by litigation over threatened and endang
e red species. C u rrent projections by Hancock, h oweve r, a re for
re t u rns of 8% in the near term .
1 6 The term used for the value of trees “on the stump” in the
wo o d s .
Capital Markets and
S u s t a i n a ble Fo re s t ry
FORESTLAND A S
AN ASSET CLASS
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