Climate change a ‘significant driver’ of next wave of timber investments: New Forests

New Forests’ Australia New Zealand Forest Fund 3 has acquired its first asset in Western Australia, purchasing hardwood plantation assets near Bunbury from Mitsui Bussan Woodchip Oceania.

Demand from institutional investors for climate-positive investments will drive the “next wave” of timberland funds, New Forests chief executive David Brand has said.

Brand told Agri Investor there was “continuous demand” for forestry assets with good fundamentals, solid market exposures and strong cash yields, with concerns around climate change becoming a “very significant driver”.

New Forests has completed around two dozen carbon-offset transactions in the US, including around $150 million of carbon offsets in California alone. It is now developing carbon-offsetting schemes with regard to its Asian assets after completing similar deals in Australia and New Zealand.

“The climate finance area is going to be the next big wave for forestry investors because it’s becoming such a dominant issue,” Brand said.

“Look at countries putting bans on petrol and diesel engines in 15 years – you can almost see the end of the tunnel. And there are all these big companies, one after another, [like] Microsoft and Amazon, putting out emissions-reduction targets. They’ve got these huge server farms with massive electricity usage, and nature-based solutions are a central idea that a lot of people are now looking at for how they can manage through the transition alongside shifting to renewable energy.”

Brand was speaking to Agri Investor as New Forests announced the acquisition of the hardwood plantation assets of Bunbury Fibre Plantations from Mitsui Bussan Woodchip Oceania. New Forests declined to disclose the value of the deal.

It is the first investment made by the firm’s Australia New Zealand Forest Fund 3 in Western Australia, and takes the vehicle to more than 70 percent deployment. ANZFF3 is a closed-end A$873 million ($578 million; €532 million) fund that closed in 2018.

The Bunbury Fibre Plantations asset includes approximately 12,000 hectares of certified plantation hardwood near Bunbury in Western Australia. As part of the deal, New Forests has established a long-term supply agreement for the processing of fibre with Bunbury Fibre Exports, a company managed by Mitsui Bussan Woodchip Oceania.

On the possibility of launching a fourth Australian and New Zealand fund now that the third iteration has reached 70 percent deployment, Brand declined to comment other than saying: “It would be logical.”

He said returns from assets in Australia and New Zealand had been “very good” for the past 10 years thanks to a steady and moderate Australian dollar, a positive housing cycle in Australia, and strong demand from China.

The coronavirus has caused some disruption, said Brand, affecting “softwood log exports from New Zealand, but it seems now that there is economic activity starting back up in China.”

He said the US-China trade war has had only a minimal impact, as exports from the US west coast were already moderating because of the high US dollar.

“Recently, there’s been significant wind storms and insect epidemics in central Europe that have led to a flood of salvage logging that has now started to flood into China, so that’s been a bit of a short-term phenomenon. But long term, that makes prospects rosier because one of your competing sources of supply is going to have a shift downward in long-term harvest rates.”

The majority of investors in New Forests’ funds, including its ANZFF series, are non-US dollar-denominated defined-benefit pension schemes, mostly from Europe. However, Brand said more domestic Australian institutions could begin to show greater interest in the asset class.

“Across the board everyone’s realizing the returns from any type of fixed-income or debt product are going to be low, potentially for the whole century now if you look at demographics,” he said. “The need for assets that have a fixed income-like characteristic in terms of cash yield, but at a reasonable rate, are what people are after. I wouldn’t be surprised if some of the big Aussie funds try to deploy more capital in this space.”

Referring to the proposed privatization of part of the Forestry Corporation of NSW, which was cancelled following bushfire damage to the estate, he said: “Certainly, I think there would have been a lot of interest if the NSW softwood asset had been brought to market.”

New Forests itself largely escaped any negative impact from Australia’s severe bushfire season. Brand described the loss of around 1,400 hectares in Tasmania as “negligible.”