Timber….on Wall Street

04Nov05

As mentioned in an earlier post the ‘Savings Glut’ is having a dramatic, and pervasive effect on global asset class pricing. E. S. Browning in the Wall Street Journal continues the series on the excess capital washing through today’s capital markets. Institutional investment into timberland has taken off, pushing up prices and lowering expected returns.

Harvard University, meanwhile, earmarks 10% of its nearly $26 billion endowment for timber, a remarkable proportion for such a small and unconventional asset class as this. Although Harvard recently sold most of its U.S. forest holdings — to another financial investor — the university is looking for new land to buy. Yale also invests in forests, as do various pension funds, insurance companies and charitable trusts. John Malone, chief executive of Liberty Media Corp., owns 75,000 woodland acres with his wife.

The money pouring into timber reflects a global hunt for higher returns as investment cash floods the world from many sources: pension funds, central banks, hedge funds, oil-rich nations and corporations with surplus cash on their balance sheets. This has created a surge in demand for “hard assets” like real estate, timber and commodities — in part because cash flooding into bonds has driven down returns on them.

Timberland is an intriguing asset class. Unlike other hard asset classes timberland is unique in that if prices are the owner of the timber has the option to defer cutting the timber. In the meantime that timber will continue to grow, potentially providing a higher payoff down the road. What has changed is that some timber owners have been selling land to developers. This increases profits in the current period, but reduces the chance to earn a steady income in the future. The question is whether the timber investment theme has been played out.

Chelsea Deweese in the Wall Street Journal chronicles the rise in the popularity of the REIT structure for timberland. Although few in number these companies have been embraced by investors both for their yield and their capital gains.

Timber REITs have performed so well that some non-REIT timber companies have faced investor pressure to do more to keep up, analysts say. Mr. Chercover says some companies are lobbying Congress for changes in the law so their timber operations would be “taxed on a level playing field with the REITs.”

But the growth of timber REITs has some on Wall Street worried. These REITs make money buying and selling timberland real estate to property developers. If the housing market cools and land sales decline, timber REITs may see their earnings suffer. In addition, a real-estate downturn could chill demand for wood for building houses, which also could hurt timber REITs.

The earlier article notes that the flood of money into timber has a number of consequences. The first is that it has reduced expected returns on timber from 8-10% above inflation to 6-9%. While still healthy, this is a bit of a haircut. The other major issue covered is the changing nature of timber ownership gives some environmentalists pause. This issue while touchy, is probably overblown in that it is in the best interest of the timberland owners to responsibly use their land.

For individual investors directly investing in timberland is difficult. As mentioned there are a handful of timber-only companies publicly traded, but that is different that the direct ownership structure institutional investors utilize. The public equity will be more volatile than the private partnerships. Indeed, in an era of excess capital, the woods are no longer the hiding place they used to be.




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