Investing in timber has long been seen as one of the safest investment options. Timber prices are unrelated to stock market prices and as such are largely immune to the fluctuations and unpredictable spikes and troughs that the stock market is prey to. As an asset class, timber has consistently out-performed the majority of stocks and commodities for over 100 years, including oil, gas and gold, and historically, timber investments have delivered higher returns than many traditional investments.
Over the past twenty or so years some of the world’s leading financial institutions, representing pension funds, endowments and insurance companies – have ploughed some $40billion (£25billion) into timber… a huge rise from just $1billion (£650million) in 1989. Part of the reason for this dramatic increase has been the soar in demand. Planning timber production requires a long term strategy with a lead time of anything from 12 years and often considerably more. This means accurately predicting future demand. Demand for timber is closely linked to population growth. Simply put: people need timber. The average person in the developed world goes through one 30m (100ft) tree per year. This may sound like a lot but if you are reading this as I am writing it; possibly at a wooden desk, sat in a wooden chair, surrounded by papers and journals, in a timber-framed house, with wooden doors and fittings, surrounded by a wooden fence………. Well, you get the picture.
With huge population growth and expanding middle classes who create an increasing demand for housing, China, India and Brazil as well as many other emergent nations will create a huge demand for timber. The United Nations predict an increase of 55% in the global population by the middle of the century and that, as a consequence, global demand for wood will almost double. China currently ranks second only to the USA in wood consumption and is expected to surpass it in the very near future. Not only is China a massive consumer of timber, it is the world’s leading importer of timber products. Timber products include building materials, office furniture and wood pulp. The market in China alone is forecast to grow at a massive rate over the coming years.
Investing in timber is only really suited to the long term investor with investment terms of 10 years or more. So with demand set to soar and supply struggling to meet it many investors are buying into timber now in anticipation of future markets.
What timber should I invest in?
Well that might depend on where you think each of the timber markets might be moving.
Option 1 – Hevea wood-latex extraction is often harvested in a high density cycle with maturity in 15 years. Normally the investor would also receive latex extraction profits after 7 years. However there are other methods whereby the latex from the sap is removed throughout the timber’s ‘latex cycle’ of between 25 and 30 years and at the end of that they are then felled for manufacturing. Hevea Brasiliensis is commonly known as the Rubberwood or Parawood in Thailand.
Hevea Brasiliensis is a hardwood from the maple family. It is extremely durable, has little tendency to warp, crack and offers low shrinkage. It is excellent for furniture manufacturing with its dense grain. The Hevea Brasiliensis produces sap just like its maple cousins but with this timber the sap is latex.
Option 2 – Hevea plantation with timber extraction only in a 15 year cycle. With untapped Hevea trees which are grown specifically for timber there will be an increase in the volume of timber harvested when compared to similarly tapped trees. Hevea plantations feed the MDF (Medium Density Fibreboard) plants worldwide.
Option 3 – Sentang plantation with a long gestation period of 15 years until harvest. The timber is known as Azadirachta Excelsa (Meliaceae), Limpaga (Sabah, Malaysia) and Ranggu in (Sabah and Sarawak, Malaysia). It is also known as Saud au in Vietnam, Sado-thiam or Thiam inThailand, Neem in India, Bawang kunyit, Kayu bawang, Mimba, Nibwak in Indonesia, Azadirachta in PNG and Danggo and Maranggo in the Philippines.
Sentang is not the most durable of timbers but it has some good uses. The timber is suitable for joinery works, furniture, panelling, mouldings, partitioning, plywood and some flooring.
Option 4 – Teak plantation investment, with a long gestation period of 15 years until harvest. Teak is a tropical hardwood from the Tectona grandis species which is native to southern Asian countries such as Indian, Malaysia, Indonesia and Burma (Myanmar). It is also cultivated in many other countries from Central American and African locations. It should be noted that Burma produce nearly one third of the world’s teak timber production.
Teak is a deciduous trees that grows up to 40 m (131 ft) tall and offers good grains and textures in a yellowish brown timber. It is the natural oils and silica within timber that makes it useful for outdoor applications. Its high weather resistance means that it is often found in external hardwood flooring, boat decks and countertop veneers, however one of the major applications for teak is in the production of outdoor furniture. These same qualities help prevent the timber from pests such as termites.
You should ask if your teak investments are from sustainable forest and not from old growth areas.
Option 5 – Acacia plantation again a long gestation period of 15 years. There are over 1,300 species of Acacia but the Acacia melanoxylon (Blackwood) from Australia is used for furniture production due to its size and ability to get a good polish from it. Acacia homalophylla (Myall Wood, Australian) has a fragrant timber used for ornaments.
Option 6 – Mixed plantation, hevea-sentang and hevea-teak with a 20 year harvesting cycle;
Option 7 – Fast growing bamboo investments;
“Timber investments tend to perform particularly well in economic downturns. During the Great Depression, for example, timber investments gained 233% at the same time as stock prices plummeted by over 70%. Timber has always been considered a safe haven.”
Historically the way to invest in timber would be to simply buy a forest, but this was obviously only something that was available to the mega rich and the timber industry rested largely in the hands of the government and major landowners. Timber was also traded on the markets by floated companies that invested in large tracts of land.
Timber investment funds
The last thirty or so years has seen a change in how people invest, with the smaller investor enjoying increasing access to investment opportunities. With private individuals now trading on the markets timber investment opportunities are available here. There are a number of Exchange Traded Funds (ETFs) that invest in timber. It should be mentioned however that many of these invest in timber for pulp or paper production. Whilst these ETFs may very well be good investments in their own right, it is worth noting the above listed advantages of timber investments do not apply to the paper and pulp industry but rather to timber that is for lumber.
The NCREIF Timberland Index is a good barometer of investment performance in the timber industry that represents all sorts of timber interests, including both lumber and paper pulp. The NCREIF Timberland Index has climbed by an average of 15% per year since 1987, comparing very favourably to many share indexes.
One of the more interesting ways for the small investor to get involved in timber, and one that is especially attractive to ethical investment is via one of the many opportunities available to invest directly into buying trees on managed land. There are lots of these schemes to be found online that offer 10 – 25 year investments in reforested regions, often in South Asia or Central America. For a relatively small sum you can buy into one of these projects and the best ones offer ownership of the trees themselves (including precise geographical co-ordinates). You will need to pay an annual management fee and a harvesting fee for the trees, but some projects offer some control over factors such as harvest time. This can be a bonus because if you decide that the time is not the best for selling the timber, if you postpone it for a couple of years your trees will continue to grow, and consequently appreciate in value.
One of the most satisfying factors of investing directly in trees; all the time that they are growing, they are worth more and more money.
Many of these projects offer some quite astounding levels of return on your investment. Make sure you research thoroughly and check that the companies can back up their figures and offer provable performance.
If you have capital that you can afford to have locked up in a long term investment, with a good history, and that is considered safe, you should maybe look closer at the opportunities offered by timber investments.
- Bamboo investments
- Forestry investment
- Ethical forestry investment
- Global forestry investments
- Renewable energy investment
- Teak investment
An alternative field to timber investments is what is known as green investments and includes trading in emissions or carbon, solar and renewable energies.