The institutionalization of timber as an asset class is often held up as a potential model for the future of a US farmland market still dominated by farmers and their families.
While such a path would be welcomed by investors looking for farmland exposure, the year ahead in timber could show that catering to the needs of institutional investors also presents significant challenges.
In a recent Q&A, Aberdeen Asset Management investment manager Ryan Sullivan reported frustration among some investors in early timber funds that have failed to deliver promised returns. Some of this frustration may have been reflected last year, when, according to a report by Setter Capital Volume, the agriculture and timber grouping saw the largest growth in secondaries transaction volume, with timber making up a majority of this activity.
This summer, North Dakota Retirement and Investment Office chief investment officer David Hunter told Agri Investor that his fund was lowering its timber allocation and contemplating a complete divestiture from the asset class, citing long investment cycles and potential for better risk-adjusted returns from infrastructure and real estate.
Those and other factors reflect challenges in the timber market that are unlikely to change significantly in the year ahead.
US housing starts, a key source of domestic lumber demand, continue to be slowed by urban Millennial would-be homebuyers not yet old enough to fully drive the market and their slightly older counterparts shut out by a combination of tightened credit and lingering effects of last decade’s housing bust.
The very development of the asset class itself is another factor weighing on timber returns. While early return projections were based on operations largely within the US, expansion into South America and Oceania have increased competition and helped lead to a lowering of returns reflected in the NCRIEF Timberland Property Index of 0.67 percent growth during the third quarter.
In April, Agri Investor reported that Brookfield Capital had elected to change its strategy and stop investing from its $1 billion Timberland Fund V before full deployment in order to avoid overpaying for assets within a crowded market with too few sellers.
Looking ahead, timber’s low volatility, inflation protection and potential for expansion from new markets such as the use of wood pellets as a low-carbon fuel source will lure investors with a focus on the truly long-term, but it will likely take longer than just the year ahead to lure investors with a hard time seeing the forest for the trees.