Traditionally, the three components of return for the asset class were timber prices, land values and timber growth. The return can be affected by a variety of factors including home building, weather and environmental issues, according to a recent real assets report by Prudential Financial Inc.'s money management unit PGIM Inc. Younger trees produce lower-quality pulpwood, while older trees are used for higher-value sawtimber like veneer logs.
When demand for sawn wood, which is used for housing, falls as it did in the financial crisis, timberland returns also drop. Housing starts are up from their lowest point of 478,000 units in April 2009, according to the U.S. Census Bureau and U.S. Department of Housing and Urban Development. The 1,235,000 units started in April 2019 are up 5.7% from March but down 2.5% from April 2018, government figures showed.
Some managers are going all-in on the beyond-forest strategies. New Forests, a Sydney, Australia-based timber manager, formed the first institutional fund investing in forest carbon and mitigation banking. New Forests has A$5.2 billion ($3.6 billion) in assets under management.
New Forests' investment strategy is to manage forests to optimize revenues from a combination of timber harvest and carbon-offset sales, said David Brand, founder and CEO of New Forests.
Timber as an asset class started in the U.S., with roughly $100 billion owned by real estate investment trusts and institutional investors, with about 70% in the U.S., 20% in Australia and New Zealand and 10% in the rest of the world, he Mr. Brand estimated. The wave of capital seeking real assets means that timber is a sellers' market.
New Forests' investment strategy is to provide project finance and credit sales for forest owners that wish to participate in carbon-offset markets established by states such as California and governments around the world. Timberland owners can manage forests for both log sales and carbon-offset sales, providing additional current income while helping to transition a forest towards older stands and higher-value wood products, he said.
For example, in September, New Forests acquired 10,400 acres of Humboldt County, Calif., timberland from Soper-Wheeler Co. LLC. as part of a strategy focused on high-carbon-value forests, Mr. Brand said. Sustainably managed forests can mitigate the impact of climate change because trees trap carbon dioxide; if trees are destroyed, overharvested or burned they are a source of greenhouse gases.
Sustainable timber management including preserving forests rather than converting them to other land uses, ending forest degradation, and restoring peatlands, could avoid about 30% of carbon emissions, according to New Forests based on academic papers.
New Forests works with landowners to create carbon-offset projects that provide another source of revenue, Mr. Brand said. In Australia, New Forests has an emissions reduction strategy in which it grows the trees to larger sizes, generating more carbon stock. In New Zealand, New Forests is replanting on degraded land.
All of this is paid for by a complex and evolving system of carbon credits, carbon credit trading and wetland and wildlife mitigation. Governmental entities, non-profits such as The Conservation Fund and companies such as those in the airline and oil and gas industries are paying for carbon, wildlife and other credits to offset their carbon emissions and/or environmental damage on their properties.
The old timber asset class is being transformed into one that encompasses conservation and production as commercial businesses, he said. "It's a new (investment) opportunity. Let's see if we can reinvent the asset class into a natural infrastructure."