News & Analysis

Capital appreciation in timberland outweighs poor operating returns

Lumber demand will not pick up in the near term, but timberland as an asset class will perform well, says MetLife Agricultural Finance

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MetLife Agriculture Finance predicts capital appreciation will continue to support the timberland sector, with operating revenue continuing to suffer, according to a report.

Timberland as an asset class will continue to perform well, the lender finds, although it is pessimistic about near-term lumber demands.

MetLife Agri’s outlook on the prospects for a recovery in US lumber demand are based on remaining obstacles in the US housing market. According to the report, home ownership rates in the US are their lowest in 36 years, which has contributed to lumber prices that sit 20 percent below 2004 highs.

“We believe that the primary headwind to a fast recovery in housing starts is that the home ownership rate will remain below the historical average of 65 percent through 2020,” said Hugues Rinfret, director of research for MetLife Agricultural Finance.

The outlook blames demographics and continued fallout from the housing crisis of the last decade for the anaemic growth in demand for new homes.

Despite the drag on operating income for timberland, capital appreciation, accounting for two-thirds of timberland returns, remains strong. While lumber prices sit 32 percent lower than their pre-recession levels, timberland values have risen 50 percent during the same period. The asset class’s low correlation with economic volatility and steady revenue have helped push values up over a decade of economic volatility and low interest rates.

The report also notes that the changing nature of timberland ownership in the US has put upward pressure on values, citing a growth in AUM for timberland funds from just $1 billion in the 1980s to more than $57 billion today.

In addition to positive trends in capital appreciation, the report predicts long-run trends will eventually support higher lumber prices. The millennial demographic will slowly move toward home-buying age, and non-housing demand drivers, like use of wood pellets for energy production, will drive houses upwards.