As we survey the institutional landscape, real assets— including farmland and timberland—continue to be a growing component of institutional investor portfolios. This growth can be explained by three key factors. First, returns from farmland and timberland are expected to match long-term liabilities arising from pension and life insurance obligations. Second, growing global demand for agricultural commodities and wood products is expected to support the future value of timberland and farmland properties. And finally, ownership of farms and forests also provides exposure to the fast-growing economies of China, India and Brazil via the sale of food and fibre.
The role of institutions
Institutional investment in timberland properties has grown significantly over the past two decades. This has been facilitated by the strategic decisions of most paper and packaging companies in the U.S. and New Zealand to divest large timberland holdings and concentrate on their manufacturing businesses. The privatization of state-owned plantations in Australia has also played a role.
Currently, institutional investors hold about one-quarter of the global investable timberland base, valued at roughly US$285 billion. The large majority of timberland held by pension plans is comprised of softwood plantations (primarily various species of pine) located in the U.S. South and U.S. West. Institutional investors also hold substantial softwood plantations in Australia and New Zealand.
The size of the global investable farmland universe is estimated at approximately US$1 trillion; however, the proportion held by institutional investors is relatively small at less than 5%. In the U.S., farmland is typically held in much smaller parcels versus timberland.
Pension plans and other institutions have been constrained by the relative scarcity of large-scale acquisition opportunities. Pension plans currently considering an allocation to timberland or farmland properties are concerned that markets are overheated. Values for farms, in particular, have increased substantially over the past decade. Much of the increase in value is potentially justified by rising productivity and commodity prices; however, investors remain concerned about compressing cash yields and declining return expectations.
Institutional investors, especially those with large amounts of capital to deploy, are also concerned about the small size of the investable timberland and farmland base relative to other real asset classes.
The future
Future developments in the timber and farm sectors can help alleviate plan sponsors’ concerns about future investments in farmland and timberland properties. Global demand for food and fibre is expected to increase over time as populations increase and economies grow. Global consumption of wood products for current uses, for example, is expected to double through 2050; however, new sources of demand (such as for biofuels) have the potential to increase the consumption of forest and farm products far beyond current uses.
Substantial increases in the area of farmland and timber plantations will be needed to satisfy the growing global demand for food and fibre. For example, timber plantation area in both Asia and Latin America is expected to double over the next 30 to 40 years. This expansion in the supply of food and fibre will require substantial amounts of capital and present investment opportunities for pension plans and other institutional investors.
Institutional investors are also likely to have access to an increasing array of investment vehicles and structures that provide exposure to farms and forests. In the U.S., for example, publicly listed timberland real estate investment trusts (REITs) hold similar areas of timberland properties as owned directly by institutions, while two farmland REITs have been established over the past few years.
Courtland L. Washburn is Managing Director and Chief Investment Officer, Hancock Natural Resource Group, a Manulife Asset Management Company