timberland investments in an institutional portfolio - Iwc.dk

Recommendations

Info

TIMBERLAND INVESTMENTS IN AN INSTITUTIONAL PORTFOLIO 62 Timberland Return Characteristics2.1 Return DriversTimberland investment returns can be described as a function of three drivers 6 (biologicalgrowth, change in timber prices and change in land value) as depicted in Figure 1.Timber pricechanges 25-30%Biological growth65-75%Land valuechanges 2-5%Figure 1. Sources of Timberland Return. Source: RMK.The split between the return components can vary considerably between individualinvestments. Other income sources (i.e. higher and better use, HBU) such as hunting,mining royalties, conservation easements etc. are applicable to some investments.Biological tree growthBiological growth is what separates timberland investments from other types of real estateinvestments, and it is estimated to be the most important return driver. The resultingvolume and consequent value change over time are, to a large extent, independent ofmacroeconomic or financial market conditions (“trees do not read the Financial Times”).The effect from biological growth on return is two-dimensional. Not only do trees grow involume, but as they grow, they also turn into higher value products (called “ingrowth”).———————————————————————————————6Caulfield, 1998b
TIMBERLAND INVESTMENTS IN AN INSTITUTIONAL PORTFOLIO 7Volume [m3/ha]450400350300250200150100500Example - Stages of pine10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46Average DBH [cm]Pulpwood Chip & saw SawtimberFigure 2. Sources of timberland investment returns – Significance of biological growth.Source: IWC internal analysis.Timber price changeNumerous macroeconomic factors influence the price of timber, including populationgrowth, GDP per capita, activity in the construction sector, interest rates, and the overalllevel of economic activity. Moreover, microeconomic factors affect the stumpage pricewithin regions. 7 However, it is important to note that during periods of declining timberprices, biological growth counters the impact of reduced timber prices. Therefore,timberland investments have a natural built-in hedge against timber price fluctuations.Furthermore, management has significant flexibility when it comes to timing the harvestof trees. By utilizing positive market conditions, management can maximize the returnfrom the investment. Timber prices have generally appreciated by 2 percent annuallyduring the past century. 8Changes in land valueUsually, land value only represents a very small percentage of the total timberlandinvestment value. Land values are related to local supply and demand conditions andtherefore vary spatially. In addition, price is also partly a function of quality. A study byWashburn 9 demonstrates that the strongest indicators of real value of land over time arethe CPI and the nominal risk-free rate of interest. During periods of low inflation andrelative timber product price stability, timberland prices tend to change slowly, and viceversa.———————————————————————————————7Caulfield, 1998b8Mercer, 20069Washburn, 1992
Page 1 and 2: TIMBERLANDINVESTMENTS IN ANINSTITUT
Page 3 and 4: TIMBERLAND INVESTMENTS IN AN INSTIT
Page 5: TIMBERLAND INVESTMENTS IN AN INSTIT
Page 25: TIMBERLAND INVESTMENTS IN AN INSTIT

timberland investments in an institutional portfolio - Iwc.dk

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?