Timberlands are at the edge of resurgence

When the housing market in the United States (U.S.) took a downturn a decade ago in 2007, the demand for lumber went down along with it.

But even as most other asset classes slowly recovered in the wake of the economic meltdown, timber performance in the U.S. remained below the historical average despite rising levels of housing construction, according to managing director of Timberland Investment Resources, Tom Johnson. And timber may finally be at the edge of resurgence again.

The issue with timberland was not so much the fact that housing demand went down, but also that timberland owners simply responded to the economic crash and decreasing demand by allowing trees to grow rather than harvesting them, according to Institutional Investor.

Normally, one of the benefits of investing in timber is storing lumber in the tree’s stump, ensuring that timberland owners are never forced to sell their investments, especially with the value of the trees themselves increasing exponentially over time when allowed to grow.

As Johnson put it, “There’s no other asset you can invest in that grows on its own and becomes more valuable if you just walk away from it.”

But after the crisis, what had been a blessing to countless investors became something resembling more of a curse. According to Robert Flynn, director of RISI, a Euromoney Institutional Investor company, lumber producers had built up a backlog of timber harvest, resulting in a supply that continued to exceed demand an estimated ten years later.

“Prices have remained flat. That has really soured some of the major investors on timber,” Flynn explained to Institutional Investor. “Additionally, the returns just haven’t been that great. The TIMOs (timber investment management organisations) are now in reorganisation mode, and are looking at better options to attract investors. It’s an interesting time; the old model worked very well for a while, but that time has passed.”

Moreover, lumber prices may soon rise in the U.S. again. According to Johnson, timberland owners have been slowly working their way through the oversupply of timber from the financial crisis. Although not quite at the same speed as they had been before the crash, houses are being built again and demand is slowly increasing. In addition, a recent pine beetle infestation in Canada also removed a large portion of competition for lumber sellers in the U.S., further balancing out the supply and demand.

“We are getting closer, just not quite there yet,” Johnson said to Institutional Investor.

 

Source: Institutional Investor