Timberland refers to an alternative form of investment that involves putting money into trees, either in managed tree plantations or natural forests. Investors bank on the predictable biological growth of the trees to increase in value so that they can be sold at a future date for their wood. Timberland investments provide an opportunity for investors who want to diversify their portfolio of investments.
Trees offer a greater sense of reassurance because they increase in volume by an average of 5% each year, depending on the tree species, climate, age, and other factors. The tangible growth provides an alternative investment opportunity for investors looking to put their money in safer investments that are not affected by the ever-unpredictable economic climate.
In the United States, there are millions of tree plantations and natural forests that are owned by pension funds, individual investors, university endowment funds, etc. Investors can become shareholders in such ventures through a variety of investment vehicles.
Timberland is an alternative form of investment that involves investing in forests and banking on the biological growth of trees to earn a return when they are harvested.
Timberland investments are used by institutional investors such as pension funds, charitable funds, and university endowments to diversify their portfolio of investments.
The underlying assets of timberlands are the tree plantations or maintained natural forests.
How Timberland Investment Diversity Stock Portfolio
Timberland, as an investment instrument, is popular among large institutional investors such as pension funds and university endowments, with the main underlying assets being managed tree plantations and tree farms. It is estimated that Timber Investment Management Organizations (TIMO), which are tasked with managing timberland investments, manage over 23 million acres of forest plantations, accounting for about 7% of privately-owned forest farms and managed tree plantations in the US.
As an alternative investment, timberland provides a good opportunity for diversifying a portfolio of stocks and fixed-income investments, as well as a hedge against inflation. Both the timber and land components appreciate in value over time, and they are not tied to traditional financial markets.
Investors get periodic cash returns from the sale of timber. In addition, they can lease out part of the undeveloped land to earn lease income from other investors. Landowners can also exploit the value of the land by introducing various outdoor activities such as camping, fishing, and hiking that serve as an additional income stream.
Why Timberland is an Attractive Alternative Investment
The following are some of the reasons why timberland makes a good alternative investment for investors looking to diversify their portfolio of investments:
1. Ease of investing
Becoming a timberland investor is a straightforward process, and investors can achieve this in two ways. The first option is to acquire forest land directly from the owner. It requires a high capital input since the investor will be acquiring the trees and the land itself where the trees are planted. An investor can finance the land acquisition using a mortgage obtained from a financial institution.
The other alternative is to purchase shares of real estate investment trusts (REIT) that focus on timber. REITs invest in the real estate industry. They allow investors to purchase shares in public exchanges in order to become part-owners of a company. The capital input can range from a few hundred dollars to millions of dollars, depending on what the investor can afford. The revenues earned by the REIT from selling trees and forest land are then distributed to the investors as dividends.
2. Biological growth
One of the attractive features of trees is that they grow physically. They increase in weight and density on a consistent basis from one year to the next. The growth is dependent on various factors such as climate, type of soil, species, etc.
In addition, better site conditions and proper tree management will improve the annual growth rates of the trees in the plantation. The US Forest Service uses a model that predicts the growth and model for different species of trees in various states.
3. Price appreciation
Stocks are volatile by nature, requiring investors to keep abreast of the happenings in the financial markets to know when to buy or sell their stocks. The only proof that investors own the shares is the stock certificate, and it can be devalued during periods of hyperinflation.
On the contrary, timber is a limited physical product that has experienced a steady price appreciation over the years. The price appreciation directly correlates to the increasing demand for timber, which is an important material in the construction industry.
The growth of the housing market offers an advantage to timberland investors who are banking on the biological growth of the tree plantations to meet the demand, and, in exchange, earn a return on their investment.
4. Land appreciation
Land appreciation is the increase in the value of land over a given period of time. Historically, land has been known to appreciate at a slow pace, but there are certain things that landowners can do to increase its value.
First, having a well-maintained forest with a good road network in a high population area can attract a high value. The forest land can be leased for use in recreational activities such as camping, hiking, hunting, etc. When the trees have matured, they can be harvested, and the land can be converted into an industrial park, golf course, or even a shopping mall.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: