In April 2009 timber prices had fallen 28% year-on-year, the biggest price decline in the last decade. Many investors baulked, yet forestry investment still outperformed both real estate and equities over a three-year annualised basis, according to the Investment Property Databank. Here, Simon James from What Green Investment outlines why this knee-jerk reaction to the short-term fall in construction will be ignored by experienced timber investors:
“Experienced timber investors will remain confident with their knowledge and understanding of the fundamentals that separate the timber market from other investment classes that have suffered so much recently.
With biological growth rates, relatively accurate forecasts can be made from historical data to predict a tree’s wood volume delivery rate. Considering the long slow and stable growth period between planting a seed to harvesting the asset, the timber market supply is therefore a relatively stable one.
Only in the past decade as a result of the construction industry boom has some instability crept in to the demand-side of the market, rallying the market and driving prices faster than previously expected. Some believe that due to the halt in construction a knock-on effect will make timber market values plummet, however a few crucial factors need considering that will prevent this occurring.
Timber growth is a long slow process and a housing construction crash now will not affect today’s timber production cycle in any way. Wood will either be harvested and sold at current slightly lower market prices, giving investors a slightly lower IRR when considering the number of years the investment is made, otherwise it will be stored rather than sold. Neither of these actions will directly drive prices down.
Timber plantations and investments also have a much lower gearing level than that of all other financial instruments during recent years, such as COO for equities and mortgages for real estate. Lower gearing within both the supply and demand-side of any market directly results in a much less volatile price market. With very little credit entering the marketing, rallying and driving prices and attracting price speculation, and subsequently deserting and in turn deflating the market, timber prices are so much more stable.
One more crucial difference between the timber markets and other investment assets is the ability to create complex financial instruments. In the equity markets all number of derivative and option markets, hedge funds and funds of funds, have skewed the perceived true value of the underlying assets and enabled the derivative market to become more “valuable” than the asset itself. In the real estate world, the off-plan investment model was devised that was dangerously exacerbated by off plan financing, further enabling re-writing of short-term contracts and falsely inflating market prices.
With global population growth at an unprecedented high, predicted to increase from over 6bn to 9.5bn in the next 40 years, there can be no question that demand on all basic human needs, including housing construction, will increase. Whilst new lower-carbon construction technologies are developed, the simple quality desired from wood products is undeniable and provides the long-term demand all wood investors understand.
Combined with the global forest protection programs being enforced by governments worldwide in an effort to reduce climate change, the long-term demand and price increase on reforestation and plantations that produce woods is an absolute certainty.”
Source: Forest funds outstrip equities and property
Category : Forestry