As the US market heats up, domestic investors are looking south to expand their timber portfolio and local governments will need to play their part.
More money is targeting US timberland than the deal pipeline can satisfy, transaction lawyer Victor Hayley told me recently. The result: domestic investors are looking beyond traditional investment geographies and warming up to emerging markets, both in Latin America and beyond.
The reasons behind LPs’ appetite for venturing further afield are worth exploring, because they show why the shift is here to stay.
The top movers in institutional timberland management today are Timberland Investment Management Organisations. In fact, since the 1990s, TIMOs have become so large that they generally trade with each other. Meanwhile, increasing institutional demand, along with some recovery in the US housing market, means higher entry prices, and ultimately thinner returns. National Council of Real Estate Investment Fiduciaries data show quarterly EBITDA returns were higher in the 1980s and 1990s than through most of the 2000s.
Investors would like to see those returns going up again. Some GPs have already started to amend their investment strategy to reflect this: Brookfield, a major timberland GP but not a TIMO, did not call on remaining commitments for its $1 billion Fund V earlier this year to pursue a more opportunistic strategy, particularly in the US. Even TIMOs are finding it harder to find new deals to roll clients’ money into assets that will meet their return criteria.
In this context, emerging markets are naturally surfacing on investors’ radars. Hayley said that one institution he’s worked with looked closely at a specific deal in the Democratic Republic of the Congo this year, but walked away because it felt it couldn’t guarantee the trees would be secure. That’s a much closer look at African forestry than most US institutional investors have traditionally entertained. It’s clear that given time, the mix of assets held by large US LPs will shift, with a growing part of the portfolio dedicated to younger markets.
Latin America will be first and top pick, and even European GPs like Aquila Capital are seeing the attraction. Peru has already enticed over $1.4 billion of timberland investment commitments this year; Panama is also becoming attractive because it uses the US dollar and offers incentives to encourage reforestation, after years of land seizures for farmland. But the biggest prize could be Argentina and then Colombia, should confidence in the region – especially political – prove strong enough.
Argentina’s neighbour, Brazil, has been a very active market for institutional investors since the early 2000s. But it’s also a case study in political and economic risk: interest shifted slightly when Brazil instigated new land ownership laws in 2010, before grinding to a near-halt as a financial crisis hit the country last year.
This suggests that, while a fundamental shift is coming long-term, investors will expand their foothold in Latin America only incrementally. And they will be looking for evidence of tangible commitment from governments before taking the plunge.
Specifically, Colombia must complete infrastructure investments making it feasible to transport timber from new forest projects. Argentina and Ecuador must demonstrate more clearly that they’re willing to shape laws that will survive the 15-year plus horizon of most institutional investors.
Investment in emerging markets is coming, and it won’t be easily turned away. But seeing it arrive may demand patience, so it’s a good thing timber investors are used to watching trees grow.
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