Stocks and bonds are the traditional investment choices for many institutional investors. But with equity markets now moving toward their previous peaks and fixed income yields near historic lows, institutional investors are returning to the land.
Timberland and farmland (known as real assets—tangible assets with real intrinsic value) offer institutional investors some particular investment attributes:
- exposure to rising economic growth in the world’s emerging economies;
- lower volatility of return, on average, than other real assets such as real estate, energy and infrastructure;
- strong risk-adjusted total returns;
- a regular stream of cash yields;
- the capacity to improve the risk efficiency of a typical mixed asset portfolio dominated by stocks and bonds; and
- the ability to match the timing of the asset’s financial maturity with the duration and schedule of a pension plan’s liabilities.
An additional positive feature is their relatively high barriers to entry—a feature that limits competition from smaller investors and makes them particularly relevant for the institutional space.
Growing world demand
Strong economic growth in large emerging markets such as China, India and Brazil has resulted in a significant jump in global demand for agricultural commodities and timber products. And that increase in demand should continue over the long term.
The United Nations (UN) estimates that the world’s current population of 7 billion will rise to 9.2 billion by the year 2050, with most of this growth occurring in the developing world.
According to the Food and Agriculture Organization’s World Agriculture Towards 2030/2050: The 2012 Revision, income per capita is forecast to grow by 2050, particularly in developing countries where large rural populations will migrate to urban areas to improve their standard of living. Urbanization and income growth in the developing world will continue to increase the demand for processed foods and livestock products.
The growth in demand for timber in the emerging economies occurs across a wide range of sectors, including construction, furniture, flooring, paper, packaging and tissue. Global timber demand is also driven by the increased use of wood as a renewable alternative to fossil fuels in the production of heat and electrical power.
Read more
Growth in global timber demand is led by continued development in the economies of Asia, Latin America and Africa. In addition, global timber demand in the coming decade will be supported by a recovery to levels of construction activity (both residential and commercial) in North America and western Europe that match underlying demographic demand.
Meeting this anticipated demand will require greater reliance on the world’s commercial plantation forests. The world’s native forests will be restricted in their ability to contribute to the need for industrial forest products, reflecting depleted inventories and increasing environmental restrictions.
The percentage of industrial timber harvested from short-rotation managed plantation forests has been increasing, and it is estimated to represent almost half of the global industrial timber harvest, according to FAO’s 2012 State of the World Forests. This provides extensive opportunities for timberland investors.