INCREASING COMPETITION in the timberland investment market will lead investment managers to explore new business models and investment structures, according to New Forests founder and Chief Executive Officer David Brand. Source: TimberBiz
He was speaking on the release of New Forests’ Timberland Investment Outlook, 2015-2019, part of a biennial series aimed at providing fresh insights into the ongoing evolution of the timberland asset class and the future outlook for trends in forestry investment.
“Over our 10-year history, New Forests has sought to bring a forward-looking perspective to our investment management business, and so the release of our latest Timberland Investment Outlook is an appropriate way to mark the occasion of our tenth anniversary,” he said.
“We began publishing our Outlook series in 2011. We saw that the successful investment of growing portfolio allocations to timberland needed to recognise shifts in global timber markets and potentially disruptive changes in technology, conservation finance, and emerging bio-economy-based markets. Given the long-term nature of timberland investing, these trends ultimately drive investment strategy.”
Amid rising interest in real assets, New Forests argues that the increasing competition in the timberland investment market will lead investment managers to explore new business models and investment structures.
“The timberland investment marketplace today is more mature, but also more complex and diverse than when we launched our business in 2005,” said Brand. “Timberland investment in the United States is now largely a secondary market, and Australia and New Zealand are also reaching the end of their primary market phase for institutional investors. This is leading to attempts to expand the timberland market geographically and thematically and to develop specialised investment strategies and cross-sectoral strategies.”
The Timberland Investment Outlook suggests that the prevalence of specialist managers and the diversity of investment structures will likely continue to increase. These investment structures include traditional timberland funds and separate accounts, as well as timberland Real Estate Investment Trusts, permanent capital vehicles, and diversified investments that control timberland assets along with processing and infrastructure assets.
“The forestry sector has weathered huge changes in market conditions. Over the past decade China has become a central driver of timber demand and energy wood pellet trade has emerged as a significant new market. However, there have also been substantial technology-related reductions in demand for newsprint, printing, and writing paper, and the US housing market has seen its largest retraction in over 50 years. Looking forward, New Forests expects near-term timber demand recovery in the US, but in the medium to long term most growth in demand for traditional timber products will come from Asia,” said Brand.
The Timberland Investment Outlook also points to the further expansion of the asset class, suggesting an opportunity for the doubling or even tripling of the current USD 100 billion of institutional capital invested in timberland.
“We know that the world will need to double its timber production by 2050 at a minimum, and to achieve this we need to deploy technologies that can dramatically increase existing plantation timber production per hectare as well as expand plantation area in a manner that does not compromise remaining natural forests.”
New Forests suggests institutional investment can support this shift through the extension of investment mandates into emerging markets and greenfield plantation development, as well as through focus on increasing plantation productivity that will drive associated asset values. The company also describes the complementary and growing opportunity to invest in conservation finance strategies that will support carbon storage, biodiversity conservation, and watershed management. Such investments can encompass both sustainable timber production and forest conservation strategies.
“The attractive growth opportunities in emerging markets such as Latin America, Asia, and Africa are undeniable,” said Brand. “However, scaling up investment in these regions means that investment managers will have to navigate complex business environments and manage significant environmental, social, and governance risks. We expect more investors and managers will look to these areas, but that overall forestry investment into these markets will remain in the order of $US 1 billion per annum for the next few years.”
For investors and other participants in the industry, taking a forward view on the forestry sector is a necessary part of ensuring the industry is positioned for not only successful investment results but meeting the growing global need for timber products and responsible forest and land management.
The Timberland Investment Outlook, 2015-2019 is available for download at: http://www.newforests.com.au/#insights.
