A comprehensive understanding of the risks involved in timberland investing helps with risk management and mitigation.
Diversification across regions, species, forestry regimes, vintage years, managers and investment types are key to risk mitigation. Additionally measured commitment and controlled investment size exposure can mitigate the risk of any specific investment negatively impacting a timberland programme. Diversification further mitigates the adverse impact of timberland risks which are typically defined by two measures – physical risks and economic risks.
Physical risks – related to the physical nature of the investments.
The risk related to damage to the physical asset from fire, wind, and diseases caused by insects are mentioned in connection with timberland investments. In fact, professionally managed timberland assets have historically experienced very limited loss in asset value. [graph Percentage asset value loss see ppt]
Fire: Varies across regions and can be mitigated through active management, infrastructure development, and fire breaks.
Wind: Actual loss is low from storms and impacted trees can still be utilized to extent.
Insects: Infestation from for example mountain pine beetle can be mitigated by accelerated harvest.
Economic risks – related to the economic and investment environment.
Timber prices: impacted by local demand and supply as well as cyclicality. Can be mitigated by diversification and harvest planning.
Timber demand: timber and log demand impacted by economic development and consumer preferences, risk mitigated by increasing forest product demand in developing regions and end markets.
Timberland supply: impacted by land availability and quality of production on the timberland. Mitigated by acquisition due diligence and active management of productivity and quality.
Illiquidity: potential inability to dispose of assets. Risk mitigated by enhancing the asset value during holding period and active positioning towards potential buyers.
Country risk: country specific factors related to timberland for example title to ownership can be mitigated through due diligence, relying on in-country specialists and diversification across countries and regions.