Why Forestry? Key Advantages
The key advantages of investing in forestry are:
1. Investments in timber by large institutional investors and endowment funds have increased significantly in the last few years. Forestry is now a widely accepted asset class.
2. Returns can be further enhanced by diversifying into species such as Agarwood which after refinement produces Oud oil, a highly valued and natural product used in the cosmetic and perfume industries.
3. The increased interest is driven by its behaviour as an asset, with stable returns and low correlation to traditional financial assets such as equities, fixed interest and other risky assets.
4. Land prices in the US, Canada, Europe, Australia and New Zealand have risen strongly in recent years and many forestry projects in those countries look overbought (decreasing forward-looking return potential). By contrast Asian emerging markets such as Thailand, Laos and Cambodia offer better land price value and lower labour costs.
5. Timber and forest investment returns are driven by three factors: biological growth, changes in timber product prices and changes in land prices.
6. Biological growth is considered to be the most significant factor contributing over 60% of the total return.
7. Asian forestry is also ideally located to meet the needs of the two most significant growing markets for forestry products: China and India.
8. Timber price changes contribute approximately 30% of the total return. They are affected by macroeconomic variables such as GDP, house-building, construction spending, interest rates, and population growth. Timber prices, historically, have risen 3% above the rate of inflation. During periods of high inflation, timber and forestry investments can act as an inflation hedge and provide capital preservation.
9. The long-term industry outlook for timber and forestland investment remains strong as the global demand for wood and paper products continues to exceed supply. The United Nations Food and Agriculture Organization previously estimate that the world consumption of timber and forestry-related products will rise more than 50% by 2030.