Sometimes there’s no greater feeling than investing in something produced by the Earth itself.
Timberland is an asset of the Earth that just may fit the bill for the savvy land investor. Timber lots are made up of tree farms or managed natural forests. Investors use timberland to see long-term returns, as well as generating profits over time through harvesting. Some call timber the ultimate agricultural investment, as wood’s value has continued to grow consistently over the last 100 years.
Shane Leonard, CFA and MD at Stockflare, says timber gives investors a chance to own something tangible and relatable. “As an investment, timber is a really easy concept for people [to understand. It is] unlike lots of other sectors where it takes quite a lot of expertise and hope to understand the investment you are making.”
Shane goes on to mention that, while direct investments in timberland may not be suitable for everyone, stock market funds offer an easy way to jump in to the enterprise without actually owning physical land.
For both physical land owners and investors owning timber electronically, there are many reasons timberland can prove to be a smart and savvy investment, with long-term growth potential.
The great thing about owning an asset like trees? They keep growing. Timberland is an asset that literally grows in size and value over time. This puts investors in a strong position, as they can choose to hold, rather than harvest, their timber during periods when market prices are lower. Joel Shapiro, CEO of Timbervest, says this is referred as the ability to “store the stump.”
Although purchasing timberland is a long term investment, it is one with few demands and near-certain returns in the long-term. Joel says your investment has nowhere to go but up. “Trees are the only investment that physically grows. They get more valuable as they get bigger. To that point, an investor can wait during periods of lower pricing and the trees will grow as prices rebound.”
Over time, timberland has proven to outperform many of the other major indexes. As owners wait for their investment to “mature,” they can be confident knowing their investment acts as a strong hedge against inflation. Timber is also renewable, unlike an oil well or gold mine for instance. Trees can always grow back.
All in all, timber will not only up your property value and equity, but provide opportunities to generate alternate streams of income. Levar Haffoney, a member of Fayohne Advisors LLC, points out that “a timberland investor can earn income through logging and hunting leases on their land.”
Harvesting timber can provide strong, non-taxable returns. “Timberland is a very tax-efficient asset class. Factoring in depletion, investors’ first capital coming back from harvesting the standing timber will typically be a return of principal, and therefore be non-taxable. Nearly all of the returns after that will be long-term capital gains. The average investor is in a great situation here because they can create income that ultimately won’t be taxed for a number of years.”
Timber is a totally unique asset that does not have a direct correlation with other investments like stocks, bonds, REITs, annuities and more. The diversification timberland provides is a major asset to have during turbulent markets. “By investing in tangible assets like timberland, you are able to retain your purchasing power in the future,” believes Levar. He further mentions that land planted with timber will hold its value despite shifting markets. After all, as Kirk Chisholm, Wealth Manager and Principal at Innovative Advisory Group, points out, Kirk goes on to say that he chooses timber as a smart diversification play. “This [feature] is a desirable characteristic for investment managers.”
Joel Shapiro is on board as well. “There is always a risk of a downturn in the economy, but with timberland, you still have the ability to capture growth and pricing power from opportunities related to energy. You have optionality with timber as an investment class that is always growing.”
In 2015, we are beginning to see even more new opportunities in timberland. Levar Haffoney says international demand may increase the value of timber. “The growth of the middle classes in China and India is stimulating demand for US based forest products. And this will continue for the foreseeable future.”
Additionally, timber growth ties into national infrastructure. As the federal government continues to make strides towards improving national infrastructure, timber may continue to be a savvy asset to hold. Joel Shapiro believes strongly in the versatility of timberland. “You have optionality with timber as an investment class that is always growing. For example, domestic timberland investments generally come with infrastructure (interstate highways, mills, ports) that is arguably more robust than any other region on Earth. As a result, demand from foreign investors for our feedstock, on top of the on-going and large domestic demand drivers, will continue pressuring pricing.”