Illiquid assets

GLOBAL INVESTOR 1.15 — 39
Institutional
investment
in timberland
through vehicles known as “TIMOs” – timber
investment management organizations. These
intermediate investment funds make exposure
to timberland simpler for non-specialist institutions,
but the larger pools of capital often
prefer purchasing the assets directly. Returns
for institutions that acquired undervalued
holdings have been strong, initially driven by
a lower discount rate boosting long-duration
assets like timber, and recently supported by
better wood demand.
Current market situation and outlook
Land devoted to investible timber worldwide
amounts to 165 million hectares
(408 million acres), roughly equivalent
to the land area of Alaska. Institution al
investors now own timberland in Argentina,
Australia, Brazil, Canada, Chile, New Zealand,
South Africa, the United States and Uruguay.
Just under half of these assets (by area) are
in North America. There is much less harvestable
timberland worldwide than forested land.
In Australia, only 1% of forested land is developed
as timber plantations.
Broadly defined institutions, such as the
military, universities and even royalty, have
held exclusive property rights in forests for
centuries. Interest in timber assets by purely
financial institutions developed in the 1980s
in response to both the growth of institutionally
managed retirement accounts seeking
diversification, and a wave of forest divestments
by large forest-product companies.
Institutions enter into forestry
In the first two decades of investment by institutions
outside the wood-products industry,
activity was confined to large university endowment
funds. US timber companies using
GAAP accounting had to pay tax on forest
owned – even when it was not being logged,
thus incentivizing them to sell such plantations
to US tax-free pension funds. Preferential tax
treatments for real estate investment trusts
(REITs) also encouraged corporate divestment.
During a period of strong equity market
returns and declining inflation, the motivation
for institutional investment was limited to
those with a long time horizon for returns and
an unusually broad mandate on alternative
investments, enabling direct holdings of unlisted
assets. This led the same institutions
interested in pioneering private equity to explore
the scope for investing in timberland, as
a component of natural resource portfolios.
Front-runners were the endowment managers
for Yale and Harvard Universities. Yale alone
holds three million acres of forests.
Harvard’s Head of Alternative Assets,
Andy Wiltshire, worked in the New Zealand
forests sector early in his career, and drove
the 2004 purchase of a 408,000-acre New
Zealand timber estate by the Harvard Management
Company. Kaingaroa Forest was the
largest commercial forest property on the
country’s North Island. A 30% share of this
huge forestry block was divested two years
ago to the Canadian Public Sector Pension
Investment Board with an additional stake
taken up by the New Zealand Superannuation
Fund. Broadening of interest from private institutional
to public institutional investment is
thus well underway.
Timber has appealed to observers noting
long-run real annual returns of 10%–15% on
intensively managed, short-rotation plantations.
Seeing the very positive returns from
timber and its low volatility, sovereign wealth
funds and large public pension funds have
been acquiring exposure to commercial forest
assets. Corporate pension plans now own
around 10% of the asset class.
Based on measured returns on investment,
timber is not positively correlated with
other assets. But, because the timber price
is responsive to house-building cycles, the
run-up to the credit crisis in 2008 saw timberland
prices climb and then drop sharply.
The sluggish recovery in US housing led to
a multiyear opportunity for pension funds
to acquire timberland assets at reasonable
valuations, and most have entered the market
The US housing market has traditionally led
timber demand and is now in a gradual recovery.
The Australia-New Zealand region has
enjoyed resilient building activity that is expected
to continue, driven by immigration. In
China and India, continuing urbanization and
construction means these markets are still
growing. Chinese plantations cannot meet
demand and are under some pressure to be
converted into development land.
Increasing institutional investment is a
safe prediction due to low current allocations
within alternative asset portfolios and since
wood usage follows wealth development.
Thus, there is growing orientation toward
the Southern Hemisphere. Recent surveys
indicate that investor interest in emergingmarket
forests is primarily European, and
that smaller-scale investors favor emergingmarket
timberlands. Sustainability is a critical
concern – particularly with indigenous
hardwood trees – but a wide range of tools
are at hand, including forest and manager
certification, NGO oversight and replanting
requirements.
Gregory Fleming
Senior Analyst
+41 44 334 78 93
gregory.fleming@credit-suisse.com
Find additional details on
our map on pages 40–41