For a long time, it was safe to regard inflation as something of an afterthought, if it was considered at all. Back in the 2010s, annual inflation in the US peaked at 3.16 percent, according to research platform Macrotrends; not too far off the Federal Reserve’s 2 percent target.
Today, anyone believing inflation was a thing of the past has been given a rude awakening.
The post-covid economic resurgence, the outbreak of war in Ukraine and unresolved supply chain issues have created a perfect storm that continues to drive prices higher across the globe, leaving investors with a dilemma about how best to shield their returns.
“We are seeing heightened demand for timberland and forestry assets,” says Robert Guest, co-lead at natural capital and timberland investor Foresight Sustainable Forestry. “One of the relevant inflationary points here regards how debt is often used by businesses and how that links to interest rates and, as such, inflation.”
In forestry and natural capital, generally, debt is seldom used and, where it is used, the levels of gearing tends to be conservative because the asset-class typically has a lower cash yield. Most of the value is held in land and long-term growing timber stock. “This means the asset class is extremely resilient when inflation is surging and debt costs are going up,” adds Guest.
“Investing in timberland will allow us to apply our expertise in managing real assets to forests, which are a natural solution to many of the world’s climate, biodiversity and social challenges”
George Gatch ,
JPMorgan Asset Management
Timberland’s growing popularity is evidenced by significant recent investment from the likes of JPMorgan, Nuveen and Manulife Investment Management. Should inflation persist, investors appear committed to creating portfolios better able to weather the storm.
While uncommon in recent times, periods of high inflation are also not entirely unprecedented. New regulations are also pushing money towards natural capital investments (NCIs). Backing timberland assets could prove to be sensible, even when inflation dips and a greater balance between economic levels of supply and demand are found.
In search of growth
The value of timber closely correlates with the working economy, which means that it is less dependent on the current rate of inflation. At the same time, demand for timberland is broad-based. Home improvement, newspapers, certain types of manufacturing and several other examples all depend on timberland. The resilience of this asset is a major reason why the likes of EY class timberland as a “green goldmine.”
Over the past 30 years, data collected by Nuveen found that returns from private timberland outperformed inflation, with an average spread of more than 6.9 percent above the Consumer Price Index. Historically, similar returns have been seen among other real assets such as farmland.
A Nuveen report from last year found that, not only have returns from land-based NCIs consistently exceeded inflation over the past 30 years (even through periods of volatility), but increases in CPI were associated with more than proportional increases in timberland and farmland returns.
In 2021, as the inflation surge was just starting to really take hold in many markets, JPMorgan announced the acquisition of Campbell Global, a forest management and timberland investing company. This was followed earlier this year by an announcement that investors advised by Campbell led the acquisition of more than 250,000 acres of commercial timberland across the southeastern US for more than $500 million. Other major timberland investments, including the $1.8 billion portfolio deal brokered by decarbonization firm Anew Climate and alternative credit manager Oak Hill Advisors, are increasingly common.
“Investing in timberland, on behalf of institutional and high-net-worth individuals, will allow us to apply our expertise in managing real assets to forests, which are a natural solution to many of the world’s climate, biodiversity and social challenges,” states George Gatch, CEO of JPMorgan Asset Management.
Data with deep roots
This is not to say that timberland assets are immune from the negative impacts of wider macroeconomic shifts. In the US, for instance, the 1980s Farm Crisis resulted in reduced export demand for timber and falling land prices across the sector. Assets closely connected to farmland fell rapidly, with lumber priced at $274.70 per thousand board feet in 1979 but falling to just $133.20 within three years.
The odd blip notwithstanding, it remains true that timberland has provided a better bet than most other assets for investors looking to ride out periods of high inflation. The price of a patch of timberland is not subject to the same volatility that affects many other asset types, because even during economic downturns a forest will continue to grow. Value is stored in the trees themselves and can be attained at a time when prices stabilize or recover.
“Demand is cyclical and what you do not want is to be forced to harvest when demand is reduced,” adds Guest. “The great thing about timberland is that you can bring your asset to market when it suits you (provided you maintain a low level of leverage, manage cashflow carefully and pursue a total return strategy). When you choose to ‘throttle down’ harvesting, the compartments that are put on hold continue to grow biologically, which gives good resilience and is a good inflation-beating tactic (due to the non-perishable nature of the stock).”
The underlying demand for timberland has remained strong even during periods of economic turmoil dating back decades. Between 1991 and 2007, annual returns for private timberland averaged 13.4 percent, with a spread to the US CPI of 10.7 percent. Unsurprisingly, when the financial crash hit, returns did fall to 4.3 percent – but even then, it remained inflation beating, with a spread to the CPI of 2.2 percent between 2008 and 2021.
“The great thing about timberland is that you can bring your asset to market when it suits you”
Foresight Sustainable Forestry
Timberland investments are not only worthwhile due to the likelihood of higher-than-inflation returns; they also provide greater stability compared to many other asset types. Between 2006 and 2022, the NCREIF Timberland Property Index displayed a standard deviation of 5.7 percent – substantially less than the 17.6 percent and 18.6 percent on offer with the S&P 500 and Russell 2000, respectively. More than equities, US treasury bills or corporate bonds, timberland provides a balance of decent returns and reduced risk.
Money grows on trees?
Confidence in timberland is being aided by long-term trends impacting every element of the wider economy. The movement toward a greater ESG focus, for example, is improving timberland’s prospects.
“Timber is a carbon-efficient and renewable raw material that will play an important role in every country’s natural capital economy with a broad range of services delivered – timber, carbon sequestration, biodiversity, positive social and economic contributions to jobs, public health, education and recreation,” explains Guest.
Late last year, Nuveen launched its global timberland strategy to expose investors to targeted, sustainable timberland assets. Manulife, already the holder of more than six million acres of timberland in the Americas and Oceania, recently promised to raise $500 million to buy sustainably managed forests for carbon sequestration. Clearly, ESG and timberland investment represent a natural alignment.
The long-term approach that is being driven by impact investors is good for returns, too. Data indicates that timberland investments work especially well as an inflation hedge when investors adopt the most forward-looking approach.
Research conducted by US-based Domain Capital Group found that while timberland has maintained a positive correlation with inflation, this only strengthens as investment periods are extended. For example, 10-year returns for US timberland investments between 1997 and 2022 showed a correlation of 0.85 to inflation – a figure that rose for 15-year and 25-year investment periods.
As well as longevity, another consideration when choosing a timberland investment is where assets are located. Different regions provide better returns at different times. The need for a geographically diversified timberland portfolio is reinforced when looking at the correlation coefficients across the US. Between 2002 and 2021, timberland assets in the US-Pacific Northwest performed best against inflation, but between 1960 and 2021, it was the US northeast where timberland assets displayed the highest inflation correlation.
This nuance reveals that beating inflation is not simply a case of adding any timberland asset to an investor’s portfolio. There remains plenty of skill required to select and manage timberland assets effectively. All investments are accompanied by risk, but long-held timberland assets are one of the best ways of ensuring that inflation will not erode the value of portfolios.
At the center of a global strategy
Tapping into increasing demand for inflation-busting timberland assets requires a balanced strategy
With global demand for timber predicted to grow 200 percent by 2050, and the movement toward net-zero gathering pace, a strategic approach is essential to balance investor goals.
One example, launched in November 2022, is the Nuveen global timberland strategy offers investors access to timberland assets across a number of core geographies, such as the US, Chile, Uruguay, Canada, New Zealand and Australia.
The strategy forms part of Nuveen’s real assets platform, which includes investment support for assets like real estate, farmland, infrastructure, agribusiness, commodities and timberland.
Shortly after its launch, the Nuveen global timberland strategy deployed capital to acquire 47,751 acres of timberland in the US. In total, the strategy is targeting a return of 5-7 percent per annum from the sale of timber and land, carbon offsets, conservation easements and the natural appreciation of assets.