| Timberland Investments: Once a US territory, now a global one |
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| 30/07/2006 | |
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The way has already been cleared by US investors. Will European investors now risk going into the woods of timberland investing, which provides long-term, inflation-related assets? In the US, the growth of this new investment market was spurred in the 1980's by pulp and paper companies divesting their forest assets as they sought to reduce their debt burden. Collecting institutional and private investors' money, specialised asset managers called Timberland Investment Management Organisation (TIMO) popped up to buy and manage those forests. Today, according to various estimations, institutional investors hold about $20-30 billion in timber assets in the US. The first US institutional investor to gain exposure to timber, the $211.1bn Calpers, did so in 1988 as it sought to diversify its real estate portfolio. It dramatically reduced its exposure to timber in 2003, when it sold off about half of its $1.2bn portfolio. According to a spokesperson for the pension fund, Calpers had $137 million invested in timber at the end of 2005. At the beginning of 2006, Calpers's timber partner sold off its holdings in US timber, and now holds assets with partners only in Australia and Brazil. Other US investors such as the Yale and Harvard Endowment funds have been making up for Calpers' partial retreat from this market. The $15.2bn Yale Endowment, which made new commitments to timber funds in 2005, shows much interest in this undervalued asset class. "Like value stocks in the marketable securities world, slower-growing forests sometimes can be purchased for overly discounted prices because of lack of interest by other investors," stated Yale's 2005 Endowment Update Publication. Harvard's $26bn endowment fund, the largest in the US, bought large tracts of timberland in New Zealand in 2004. Timber accounts for about 12% of Harvard Endowment's real estate portfolio. International development However, timberland investments are no longer the sole preserve of the US. "Although institutional timberland investing began in the U.S., there is a rapidly increasing interest in investments in other countries," confirms Jon Caulfield, director of research at the RMK Resource Group. "To date, most non-U.S. institutional timberland investments have occurred in the southern hemisphere. Destination countries include Australia, New Zealand, Brazil, Uruguay and Chile. However, some investments have also been made in various countries in both western and eastern Europe." "There are opportunities to invest in Europe, but the scale is much smaller, and return expectations generally lower," adds Peter Mertz, CEO of Global Forest Partners, a TIMO with offices both in the US and South America. In turn, and as one would expect, it is in Sweden, with its large pulp & paper industry, that timber investors are most likely to be found. The experience the SEK192bn (€20.7bn) Third Swedish National Pension (AP3), which has committed a total of SEK1bn (€108 m) to timberland, closely mirrors the short history of US timberland investing. AP3's investments in timberland are made up of shares in Bergvik Skog and holdings in two international timberland funds, with a third commitment to an international timberland fund in 2005. As happened for large US pulp and paper companies, Bergvik Skog is the holding that resulted from pulp and paper company Stora Enso and packaging company Korsnäs' divestments from their forest holding in Sweden. In 2005, the Bergvik holding generated a return of 4.9%, with prices for Bergvik's timber products relatively stable during the year according to AP3. The fund's investments in international timberland funds delivered a return of 47.4%. All in all, non-US pension funds that have so far invested in timberland come from countries well-endowed with forest resources such as Sweden, Canada and New Zealand. For instance, the CAD96.1bn Ontario Teachers Pension Plan (OTPP) in Canada, has a partnership with the Hancock Resource Group. The New Zealand Superannuation Fund, whose operations began in 2003 with $2.4bn in cash and now has total assets of $9.8bn, has a target allocation of 2% to timber for June 2007, with a range of 0-5%. It has appointed two managers, GMO Renewable Resources and Hancock Timber Resource Group to manage timber in New Zealand and the United States. French investors, mostly due to regulatory limitations and small capitalised pension market, have so far stayed away from investments. Nevertheless, some French pension executives have been pondering this type of investment. "Our international counterparts certainly have much more flexibility than we have," the executive of a large French pension fund told bfinance. "They can invest in infrastructure and timberland and create a subsidiary to do so, which is something we cannot do at this point." Julien Laplante |
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