Nearly all return on investment generated by timber hails from the biological development in sized the timber source, from seedling to sapling to completely fledged tree. Typically, one particular tree’s number of wood raises by between 2% and 8% each year based on species, age and climate. On the simple level, this gives the tree owner more timber to offer over the years, and hence generates a larger return from the long-term.
Besides this basic observation there is more to take into account, as trees yield an increased sale price after they become bigger product classes. As an example, a little tree would only be suitable for paper products or biomass for fuel, the place where a larger tree might be harvested for sawn-timber that will fetch dramatically higher prices per tonne and could be employed for products like plywood or telephone poles.
Research by Professor John Caulfield of the University of Georgia discovered that biological growth counts for over 60% of total financial returns, whilst increases inside the expense of timber, and capital appreciation from the land take into account the rest of returns generated from a timber plantation.
This goes to indicate that it is an efficient strategy to lease find which growing timber, as well as purchase outright as only 6% of income is derived from capital appreciation in the valuation on the land. This also implies that fluctuations within the price per cubic metre or tonne of timber have limited affect on the overall performance of timber investments. The majority of return is produced by the expansion from the height and width of the tree itself.
The common benchmark for timber is The NCREIF Timberland Index, which increased 18.4% in 2007, versus a 5.5% rise to the S&P 500. From the long-term, the Timberland Index has outperformed all major asset classes including, large-cap stocks, International equities and corporate bonds.
Whilst small-cap equities have outperformed timber inside the long-term, after factoring in risk (as reflected within the Sharpe Ratio), timber has exhibited the greatest risk-adjusted returns of any major asset class. In comparison to the S&P 500, timber has displayed a minimal risk characteristic. Since its 1987 inception, the NCREIF Timberland Index has fallen in mere 12 months: – 5.25% in 2001, simultaneously, the S&P 500 has fallen 4x, including -22.10% in 2002.
One of the many reasons investors, especially large institutional investors, consider timber, is the fact that the asset displays low to zero correlation to assets, particularly those related to real estate markets. It’s been demonstrated more than a long time that adding timber to some portfolio of investments has got the aftereffect of improving overall risk-adjusted returns. This low correlation reflects the reality that the main driver of returns-biological growth-is unaffected by economic cycles.
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