Timberland investment has traditionally been seen as a reliable inflation hedge. Timber is needed worldwide for various purposes, including the production of paper and furniture, e-commerce packaging, and construction. There are millions of acres of timberland in the U.S. alone, owned by a diverse range of investors, including charitable organizations, private companies, and individuals.
Why Invest in Timberland?
Timberland is popular among investors seeking to diversify their portfolios, as it is typically resilient against inflation due to the stable demand for timber in construction and the ability of trees to continue growing and gaining value even when harvests are delayed. The global market for saw timber and solid wood products has remained stable even after years of pandemic and significant supply chain disruptions that affected many commodities.
We expect demand for wood in construction to remain robust, as it is a more environmentally friendly material than many others, such as cement and steel. Using timber wood for construction purposes will, therefore, help the building industry to adapt in line with the green transition, as governments put increasing pressure on companies to decarbonize.
The purchase of timberland can help companies to offset their carbon emissions under national carbon-cutting schemes. Many companies may also be eligible for tax credits and other incentives for investing in carbon-cutting operations. We expect more companies to invest in timberland as a means of enhancing their ESG practices. Developing sustainable forest projects that provide rural jobs and improve biodiversity will promote better ESG practices and help boost overall company profits.
Strong Cash Yields and the Potential for Capital Appreciation
We envisage timberland investments to achieve strong cash yields of 7% to 10%, despite the ongoing inflation and other economic challenges. Following the pandemic, many people are seeking to purchase homes or renovate their properties.
Rising inflation and interest rates prompted people across the U.S. to delay spending in the housing market in 2022, resulting in pent-up demand in the property market. In addition, restrictions during the COVID pandemic encouraged many people to move out of cities to suburban areas, where the use of lumber in construction is more common.
With the easing of supply chain disruptions last year, both the supply and demand for lumber have continued to rise, and elevated prices are expected to persist over the next 12 to 18 months. We believe that innovations in lumber production, primarily through the construction of new mills, will help balance the supply and demand for wood in construction, as companies shift away from the carbon-intensive production of other building materials. Investors in timberland will benefit from developing projects that promote carbon cutting, biodiversity, and sustainable reforestation.
Our Outlook Remains Positive
We anticipate an increase in investment in timberland by NGOs, corporations, pension funds, and family offices. The strong ability of timber to withstand inflation and other economic challenges makes it an attractive investment opportunity. Furthermore, we anticipate that the demand for wood products for construction and e-commerce will continue to grow in line with the green transition, as a more climate-friendly alternative to many other building materials.
