The vast majority of return on investment generated by timber hails from the biological growth in size of the timber source, from seedling to sapling to fully fledged tree. Typically, one particular tree’s level of wood increases by between 2% and 8% annually determined by species, age and climate. Over a erogenous level, this offers the tree owner more timber to sell after some time, thus generates a larger return from the long-term.
Apart from this basic observation there is more to take into consideration, as trees yield a better selling price once they come to be bigger product classes. For example, a small tree would just be suitable for paper products or biomass for fuel, in which a larger tree might be harvested for sawn-timber that can fetch dramatically higher prices per tonne and could be used for products including plywood or telephone poles.
A survey by Professor John Caulfield from the University of Georgia learned that biological growth counts for more than 60% of total financial returns, whilst increases within the price of timber, and capital appreciation in the land account for most of returns produced by a timber plantation.
This holds to indicate that it’s a highly effective strategy to lease find which growing timber, in addition to purchase outright as only 6% of profits are based on capital appreciation inside the worth of the land. This also demonstrates fluctuations inside the price per cubic metre or tonne of timber have limited influence on the entire performance of timber investments. Virtually all return is generated from the expansion inside the size the tree itself.
The conventional benchmark for timber will be the NCREIF Timberland Index, which increased 18.4% in 2007, versus a 5.5% rise for that S&P 500. Inside 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 within the long-term, after factoring in risk (as reflected inside the Sharpe Ratio), timber has exhibited the very best risk-adjusted returns from a major asset class. As opposed to S&P 500, timber has displayed a low risk characteristic. Since its 1987 inception, the NCREIF Timberland Index has fallen in just one full year: – 5.25% in 2001, simultaneously, the S&P 500 has fallen four times, including -22.10% in 2002.
One of the many reasons investors, especially large institutional investors, turn to timber, would be the fact the asset displays low to zero correlation with other assets, particularly those connected to real estate markets. It’s been demonstrated over a long period of time that adding timber into a portfolio of investments has the effect of improving overall risk-adjusted returns. This low correlation reflects the fact that the principal driver of returns-biological growth-is unaffected by economic cycles.
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