Timberland asset class
Updated: Feb 14, 2022
Timberland is a relatively new asset class for institutional investors that first emerged in the U.S. in the early 1980s. Today, an estimated US$100 billion of institutional capital is invested in timberland worldwide.
Timberland is considered a “real” asset. It is real in terms of a hard asset that you can see and touch. It provides a “real” rate of return, meaning it returns cash back to the investor and is positively correlated to inflation. Projected timberland returns are typically calculated in real terms (without the effects of inflation). In addition, timberland has a unique biological growth attribute. Even when timber is not harvested and sold as logs, the trees continue to grow in size and value.
NCREIF publishes a Timberland Property Index patterned after the NCREIF Property Index, which is well known for measuring commercial real estate returns. NCREIF compiles the data from members who submit return information specific to the properties they manage. This becomes the basis for the composite return figures for the timberland asset class.
Timberland returns, represented by the NCREIF Timberland Index, have outperformed stocks and long-term corporate bonds since 1987 until today.
The primary reason investors initially consider adding timberland to their portfolio is diversification. Due to historically low correlation with other asset classes, natural inflation hedging characteristics, and relatively low risk, timberland investments have provided decades of attractive risk-adjusted returns compared to traditional asset classes (Campbell Global Internal Research).
Unlike an annual agricultural crop, timber’s long-term biological growth provides a unique opportunity to capitalize on periods of high pricing, while mitigating the risk of lower prices through deferral of harvest. Timberland offers further diversification through different age classes, geographies, species, products, and markets.