Timberland investments in the United States: A review and prospects

Research trends: Forest investments as a financial asset class

“…Further, Mei (2019) confirmed that that timberland serves as risk diversifier in institutional investors' portfolios. Timber REITs have some risk-reduction ability but at the same time track the stock market closely, so have higher systematic risk than TIMOs, which have unique advantages as land management investments ( Mei and Clutter, 2020 ).…”

“…Institutional timberland investments began in North America and have grown significantly from virtually zero in the early 1980s to more than 100 billion U.S. dollars today ( RISI, 2015 ). During the last decades, we observed that forest products companies have been divesting their timberlands and outsourcing the business of growing and harvesting timber ( Mei, 2019 ). This conversion was prompted by (1) the shift in production from diversification to specialization and in consequence, rising demand from TIMOs and REITs; (2) declining incentive to own and produce a company's own wood supply due to relatively poor corporate financial performance; (3) reduced insurance value of timberland due to expanding and reliable timber supplies; (4) significant undervaluation of timberland under the U.S. generally accepted accounting principles, where book values reflect historical acquisition costs rather than fair market values; (5) expensive federal tax treatment for C-Corporations, and the opportunity to structure forestland holdings as a pass-through tax entity and avoid corporate taxes; (6) opportunities to cash out on significantly appreciated land values and (7) changes in regulations of private pension plans in the U.S. (The Employee Retirement Income Security Act, 1974) requiring them to diversify beyond stocks and bonds ( Zhang et al, 2012 ; Mendell, 2016 ; Mei, 2019 ).…”

“…Therefore, each forestry investment should be treated with caution and on a case by case basis. Factors such as biological growth and timber prices ( Chudy et al, 2020 ), bioenergy market and contractual rights and obligations on the properties ( Mei, 2019 ), tax structure ( Li et al, 2020 ), availability and characteristics of forest service contractors ( Štěrbová and Kovalčík, 2020 ) or even other forest merchantability limitations in given regions ( Pokharel and Latta, 2020 ) may vary and may significantly impact IRRs of specific timberland investments.…”

“…Third, although timberland investments done by institutional investors started in the 1980s, there is still a knowledge gap regarding excess returns compared to market index/benchmark (alpha) or systematic risk (beta) that forestry investments generate. For instance, Mei (2019) suggested that classic asset pricing models have difficulty in pricing private-equity timberland assets. Thus, more research on private equity markets, companies that purely invest in forestry (not only on vertically integrated forest industry companies) should be done.…”

Pension-Fund Investment in Forestry

“…For example, using a portfolio optimization model, Healy, Carriero, and Rozenov (2005) found that adding an allocation of just 10 percent to a non-timber portfolio results in significantly higher returns with lower standard deviation. Mei (2019) summarized the findings of 68 peer-reviewed journal articles in timberland investments in the United States published after 1980, concluding that (i) timber-land is a risk diversifier in a portfolio whether standard deviation or value-at-risk is used as the risk metric; (ii) classic asset pricing models for private-equity timberland find significant alpha (i.e. excess returns above what would be expected given their risk), and (iii) timber Real Estate Investment Trusts (RE-ITs) have some ability to reduce portfolio risks via diversification, but show no excess returns.…”