Should we follow the institutional money into Timber?

Timberland investment has traditionally been the preserve of the private, non-industrial landowner, accounting for a staggering $150 billion globally.

However over the last 20 years, institutional investors have discovered this ‘perfect’ asset and now own around $35 billion worth of timberland globally, in a combination of over 100 private pension, foundation, and endowment funds. Of that around $25 billion is invested in the United States, which represents both the world’s largest producer and user of timber.

Pension funds such as Calpers, led the way in the 1980s, however it was the big university endowment funds such as Harvard and Yale that saw the true potential and invested heavily in a move to diversify their portfolios globally. Last year the Harvard Endowment Fund invested $500m in forestry and carbon credits in New Zealand.

So what makes timber such a popular asset with institutions and what are the fundamentals driving this perfect asset.

Timber can be classified as a specialised form of long-term bond. A forest that holds mature timber will generate cash each year through the harvest and sale of timber. These harvests can be modeled and forecasted with a reasonable degree of accuracy over many years. Since timber growth and subsequent harvests are scarcely affected by the movement of financial markets, forest investment can be structured to act and behave in many respects like a long-term bond.

Most view Timberland as an investment in real estate. While traditional commercial real estate generates income from leasing, timberland derives its primary income from the sale of timber and more recently from carbon credits.

However its tax that has been the major driver of forestry investment in the UK, if held for 2 or more years the Forestry land can be passed on to family members with no Inheritance tax. Timber harvest is also exempt from income tax making this especially popular as a wealth protection asset.

Risk Reward

Timber is a low risk, high return asset which has outperformed stocks, bonds and other commodities for the last 30 years. From 1973-2002, managed timber returned roughly 15% annually as an investment, while stocks returned around 11%. Timber, like most commodities, is uncorrelated to stocks and unlike all other commodities continues to grow on the stump in recessionary times.
In summery forestry:

  • Provides true investment diversification
  • Responsible and ethical investment
  • Low correlation to equity markets
  • Continued accretion of value due to the biological growth of trees
  • Forestry prices are very stable over time with long growth periods and minimal demand and supply fluctuations
  • Huge upside potential based on impending supply crisis
  • Unleveraged
  • Flexible exit options: with a range of harvest dates forestry investments have great exit strategy flexibility
  • Global regional exposure and diversification: varying currency depending on project location
  • Arbitrages in the price of emerging market forestry
  • Tax advantages for: IHT,IT,CGT
  • Carbon credit revenue from non-Annex one countries such as Brazil
  • Demand & supply: global consumption of tropical hardwoods has multiplied nearly 25 times in the last 4 decades and population growth rates continue to accelerate. Around 40m acres of tropical forest are being destroyed each year and not being replaced, whilst international political pressure on forest protection increases pressure on illegal deforestation, further enhancing timber values.

Timber vs. stocks

Not only does timber beat all other major asset classes, but it also does so with lower volatility. The below graphic demonstrates this. Timber has had just three “negative years” in the last 45 years whilst stocks, comparatively, have had 12 “negative years” over the same period. The last great bear market in stocks began in the late 1960s and lasted until about 1980. An investor in stocks during that period lost money due to inflation alone.

Diversification

Commercial timberland is affected by a different set of macroeconomic and market factors than other asset classes such as stocks, bonds, and real estate, the traditional mainstay of most investment portfolios. The addition of a low correlation timberland asset can expand the risk-to-return profile of any portfolio.

Why timber prices will continue to rise

Demand for timber is raising fast, especially from the emerging economies of China and India. One current forecast predicts that China’s urban population will increase from 530 million people to 875 million people by 2030. The equivalent of almost 50 cities the size of greater London will have to be constructed over the next 20 years to accommodate them, putting huge strains on global timber prices.

Global consumption of tropical hardwoods has also multiplied nearly 25 times in the last 4 decades. Populations continue to swell as more people seek to consume and live the middle class ideal. Around 40m acres of tropical forest are being destroyed each year to meet the demand for hardwood product and agriculture, of which little to none is being replaced.

International political pressure on forest protection is increasing, the invention of the Carbon Credit has created a value for living trees. This has a very positive effect on global climate change, however it will only seek to further enhance timber values through supply shortages, good news for forestry investors.

Green and ethical investment-biological growth

Aside from its carbon capturing properties, forestry is an incredibly green construction material. The table below demonstrates the amount of energy needed to create each respected construction material. Also by using sustainable timber the carbon within is locked up for the life of the project.

Aside from offering risk adjusted returns and portfolio diversification, timberland continues to add value due to the biological growth of trees at no extra cost unlike other real-estate assets, all the while sequesting carbon from the atmosphere. Trees grow in volume, size, and ultimately into increasingly higher-valued products.

For example, trees begin as lower-value pulpwood, then grow into low value saw timber trees (9 to 12 inches in trunk diameter) before maturing into high value saw timber (greater than 12 inches in trunk diameter).
As a tree grows into a larger and higher value product classes, the monetary value of the tree increases along with its carbon credit value. The effect of inflation and possible downward movement in timber prices is mitigated by volume growth; however what makes timber such an attractive investment is the effect of upward price movement is compounded by volume growth.

Timber continues to grow although at a slower rate as trees mature. This allows the investor to “warehouse” the timber “on the stump,” until such time as market conditions are optimal.

Timberland portfolio structuring to produce specific investment objectives

Timberland is an incredibly diverse asset and can be structured to meet different investment objectives. For example, higher cash flows can be achieved by including a higher proportion of more mature timber holdings such as teak.

If long-term gains are more important than regular cash flow, this goal can be achieved by acquiring young plantations and investing at the seedling stage for maximum long term uplift combined with high growth rates and intensive management techniques.
If the investors’ objective is a balance of cash flows with an emphasis on long-term appreciation, various timber age classes can be included in the portfolio to achieve this goal. In addition, investment returns can be improved with a variety of additional structuring and management options such as carbon credits, the use of leverage, selling selected properties that have real estate development potential or recreational use value such as shooting right.

In short, timberland investments have the versatility to be shaped through financial engineering to meet a variety of goals for both the institution and the sophisticated private investor. Its amazing how few investors have exposure to forestry in light of the above, a fact which won’t stay this way for long, double digit returns and tax benefits will attract a vast number of investors especially as the green revolution takes hold.

What the experts say

Tree growth averages about 8 per cent a year. “If the market goes up that is an added bonus [to the tree growth]. This is what makes timberland a safe investment,” says Liane Luke, head of timber investment at Four Winds, which manages specialist fund Phaunos Timber.

Bloomberg Wealth Management: Hardwood has quietly and consistently outperformed nearly all other commodities for the past 100 years

Another attraction of forestry investing is that when timber prices fall, there is still a “steady offset of the physical growth of the tree”, says Eva Greger, who runs GMO Renewable Resources, the large Boston-based fund manager that has been putting money into forestry since the 1990s.

For More Information on Forestry Investments Click Here

Eco Homes Worldwide

Eco-friendly or sustainable homes are no longer the preserve of ‘hippies’ or some mythical people from the future. They are being built here and now, and if you live in the United Kingdom (as well as many other countries worldwide) there may even be one near to where you live. If there isn’t yet there will be from next year when the Government initiated Code for Sustainable Homes is fully introduced in England and Wales.

From 1 January 2010, level three of the Code for Sustainable Homes becomes mandatory for all new commercially built homes in England and Wales. The Code, has become a single national standard for design and construction elements which impact on the sustainability of a new home and addresses energy efficiency, water efficiency, surface water management, site waste management, household waste management and the selection of eco-friendly materials.

The most significant part of the Code is the need from 1 January 2010 for all new commercially built houses to be 25 per cent more energy efficient than is currently the case, as applied through Part L of the 2006 Building Regulations. But that shouldn’t be a cause for alarm. The upshot is all new homes should be more pleasant to live in, will have lower fuel bills (because the houses are better insulated and less thermally inefficient) and will, in the main, look just like the house you live in now.

That’s because much of the technology that makes them energy efficient or eco friendly is inbuilt in the fabric of the house and is invisible to all but the trained eye. So they will be better insulated in the roof space and cavity walls (places you won’t see). They’ll also have grey (bath and shower water) recycling inbuilt, which will be recycled for use in your toilet and washing machine. The building materials used in construction will be from sustainably certified sources.

At a higher level of the Code e.g. Level 6 (the highest), which is zero carbon, it’s necessary for the homes to be powered and heated from renewable energy sources – solar, wind, or water or from the earth – and not from fossil fuels – coal, gas, oil – which when burned to produce energy emit CO2. So if you look around you at new houses, you’ll notice many of them have solar panels on the roof, and you may even spot the odd wind turbine.

The Code for Sustainable Homes is the most robust piece of environmental legislation yet to have been implemented worldwide. However, several other countries are not far behind. In Spain, all new homes must be built with solar thermal for water heating. In France, legislation compels developers to install 40% of glazing facing south (for passive solar gain). In Portugal progressive measures have lead to around 11 per cent of its annual electricity requirements being provided for by wind power.

Alma Verde Portugal

AlmaVerde Village & Spa at Lagos on the Western Algarve, Portugal, was one of the first commercial resorts to adopt sustainable technologies to reduce energy consumption. The developer pioneered the Coolhose system, which ensures a constant 26C degree temperature whatever the external temperature whilst saving 94 per cent on CO2 emissions and energy consumption against the Portuguese average. Local and sustainable building materials are utilised to build the villas, more than 60 of which have been built. Prices start from €550,000.

L'Amandier Morocco

In Morocco, boutique retreat L’Amandier, which is located in the High Atlas Mountains, one hour from Marrakech, is being developed under a broadly environmental banner. The stylishly modern 16 two and three bedroom have been designed to maximise passive solar gain and retain heat through high thermal mass and insulation. Local and sustainable building materials are being utilised, including fenestration, doors and the aggregates used for construction. Prices start from £280,000.

The British developers of L’Amandier, which is only 15 minutes from Sir Richard Branson’s acclaimed hotel Kasbah Tamadot, are engaged in initiating a local waste management system. The aim is to collect waste from local hoteliers, including Kasbha Tamadot, and villages, which will provide a much-needed service and also create local jobs and a greater civic responsibility. In doing so the environmental impact of poor waste disposal and CO2 emissions will be lessened.

Medina Palms Kenya

In Kenya, Medina Palms, an environmentally sensitive resort development of 50 villas and apartments at Watamu, on Kenya’s Indian Ocean coast, has a local and sustainable agenda. The British developers support the Born Free Foundation, and a local marine conservation initiative, Watamu Turtle Watch. Around 200 local jobs will have been created once the resort is completed in 2011. Onsite, hot water will be generated from solar power, and two underground biodigesters will be process greywater that will be reused for irrigation purposes. Prices start from £170,000.

Emerald Monkey Panama

Across the other side of the Atlantic Ocean, Emerald Monkey Eco-luxe Resort & residences, located in the Bocas del Toro archipelago, off the Caribbean coast of Panama has been conceived as one of the world’s first carbon-neutral developments. The ambition will be achieved through the use of hydro electricity – a renewable source of energy – and energy reduction initiatives, such as LED, lighting throughout. Water will be drawn from local wells and recycled. Prices start from $75,000 for a one-tenth fraction of a one-bedroom villa; whole villas are priced from $565,000.

NOTE: The developments above and more than 100 other eco developments worldwide in 29 countries, including the UK, are profiled and assessed on independent website http://www.whatgreenhome.com/

Source: Gordon Miller

“One swallow does not a summer make’’, nor mark the end of climate change- Aristotle (384 BCE – 322 BCE)

It happened again this week; one of the most infuriating misuses of English language reared its ugly head.  However unlike just about every other political scandal to have coined this vile term, this one actually had some bearing on my life. By attaching the word “Gate” to the end of a sentence this in some way helps create a higher level of panic, spreads fear at a greater rate and has Daily Mail readers reaching for their shot guns across the country.

Whether this particular scandal started in a small hidden town in Russia or with a scientist in East Anglia one thing is very apparent- IT did NOT start in the Watergate Hotel. Continue reading “One swallow does not a summer make’’, nor mark the end of climate change- Aristotle (384 BCE – 322 BCE)

One more American publicity stunt

As the Conference of Parties in Copenhagen approaches next week, 192 nations of the World prepare to meet to solve the global pollution problem and find a workable replacement to the Kyoto Protocol. Being something that the US has still not signed up to, what was desperately needed to add weight to this gathering was an official emissions-reduction target from the United States. However the US and China, the 2 largest polluters in the World responsible for 50% of global pollution, have given us nothing more than a cheap publicity stunt. Continue reading One more American publicity stunt