Investments in timberland typically combine an investment in land and timber. Investments are made in both plantation forestry assets and semi-natural forest, both being managed primarily for wood production. Investments are often absent of, or have limited downstream exposure to, wood processing and manufacturing activities.
Important return drivers
Ingrowth – Example – Stages of pine:
Biological growth is a distinct characteristic for private timberland investments. Trees grow in volume and consequently also in value over time (and this is known in the industry as ingrowth). The ingrowth is independent of economic market conditions and contributes to the diversification characteristics of the asset class.
Productivity or the tree growth rate impacts the volume and consequently the value of timberland assets. It is important to correctly assess both the predictability of the expected growth rate and the standing volume of existing inventory. IWC’s investment data enables us to evaluate growth assumptions and value development of timberland assets worldwide. Where possible, we also assess how the volume and value of existing assets has been derived.
Timber prices are driven by economic factors such as growth, housing construction development, and population growth. Importantly, industry development and local mill capacity also influences timber prices. Harvest flexibility provides optionality to adjust harvest volumes to economic cycles and thereby improve prices. IWC monitors macro economic factors relevant to timber price developments such as supply/demand outlook and how industry expansion may impact timber prices. We also assess how investment managers think about managing assets under different market conditions.
Timberland values are influenced by the characteristics and location of the assets, capital availability, and asset supply and demand. Acquirers’ perception of the required returns, or discount rate of future cash flows, also influences timberland values through changes in discount rates.