The US timber and farmland markets are set for a busy year, with some saying 2015 will be the best window within the last five years for institutional investors to allocate to farmland. But will buyers or sellers prevail?
US timberland transactions began picking up towards the end of last year and the start of this year with deals from investment managers Hancock Natural Resource Group, Resource Management Service, Timberland Investment Resources, Potlatch REIT, Molpus Woodlands Group and CatchMark Timber Trust.
While a fourth quarter uptick is fairly typical, timber fund managers say activity has materially increased in recent months due to a number of market dynamics.
“A few things are coming into play at the moment,” said Tony Cascio, a senior vice president of investments at fund manager Resource Management Service (RMS). “Some of the early investment funds that launched 10-15 years ago are starting to expire. This is combined with improved market conditions over the last year or so as the housing production market improves, making it a reasonable time for such investors to sell.”
Timberland values fell in the wake of the global financial crisis and only started to pick up significantly in 2012, according to data from Timber Mart-South, a data company.
“We bought a property from someone in the autumn who had been thinking about selling for four years, but hadn’t been getting the right value until then,” said Hugh Humphrey, founding partner of Timberland Investment Resources Europe (TIR).
Crescent Communities’ divestment of 14,000 acres of Carolina-based timberland assets this week is a case in point; the real estate investment firm has long been more focused on residential, resort and office real estate than in forestry but waited until now to dispose of the non-core assets. TIR purchased the assets for a UK-based pension fund client.
RMS similarly divested an asset from its 2006 fund in December, keen to capitalise on strong valuations. “We saw a good opportunity to make some returns for our investors because there was not much inventory out in the market,” Ed Sweeten, an RMS executive focused on acquisitions & land sales, said at the time.
But increasing activity and more timber properties available for purchase means this divestment opportunity might be limited, argued Sweeten. The rise in prices has also made things more challenging for the buy-side, argued his colleague Cascio.
“There are no screaming deals, as we find most assets are fully priced – so we have to keep our pencils sharp,” he said.
That’s also been the case recently with the US farmland market, UBS AgriVest’s Jim McCandless told me this week. The farmland investment firm bought relatively little last year because of high pricing.
Much of 2014’s highly-valued farmland market was supported by intense competition from strategic farmers with ample cash from years of high commodity prices and farm incomes: in Iowa, 78 percent of all farmland was purchased by farmers, according to Iowa State.
But falling commodities at the end of 2014 have squeezed margins pushing net farm income estimates down 25 percent. This paints a different picture for 2015, argues Patrick Cheney of Colvin & Co, a US farmland investment firm.
“We think 2015 is the best window in the last five years for institutional investors to allocate capital to farmland,” he said. “The estimated reduction in 2014 net farm income will remove many farmers from the buying pool, giving investors a better chance of identifying acquisitions.”
Brokers are also noticing an increase in farmers wanting to sell their land and lease it back to improve their balance sheets and raise capital for operational expansion.
“You can’t open a farmer publication right now without seeing an article on cash conservation and working capital management,” said Jonan Kolb, vice president at Moore & Warner Farm Management.
While USDA forecasts earlier this week painted a mixed message for commodity crop prices in 2015, many arrows point to an appealing farmland acquisition market for investors. And while 2015 will undoubtedly be a busy year for timberland investors, the jury is still out on whether buyers or sellers will prevail.
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