Most roi generated by timber comes from the biological development in height and width of the timber source, from seedling to sapling absolutely fledged tree. An average of, an individual tree’s volume of wood raises by between 2% and 8% yearly based on species, age and climate. With a very basic level, this offers the tree owner more timber to sell over the years, thus generates an increased return in the long-term.
In addition to this basic observation there’s more to consider, as trees yield a larger sale price whenever they grow into bigger product classes. As one example, a small tree would only be suitable for paper products or biomass for fuel, where a larger tree may be harvested for sawn-timber that can fetch dramatically higher prices per tonne and could be useful for products including plywood or telephone poles.
A survey by Professor John Caulfield of the University of Georgia found that biological growth counts for more than 60% of total financial returns, whilst increases in the price of timber, and capital appreciation of the land take into account the remainder of returns generated from a timber plantation.
This goes to demonstrate that it is an efficient technique to lease find which growing timber, and also purchase outright as only 6% of income is produced from capital appreciation within the valuation on the land. And also this demonstrates fluctuations within the price per cubic metre or tonne of timber have limited impact on the complete performance of timber investments. Many return is produced by the expansion in the size of the tree itself.
The common benchmark for timber could be the NCREIF Timberland Index, which increased 18.4% in 2007, versus a 5.5% rise for your S&P 500. From the long-term, the Timberland Index has outperformed all major asset classes including, large-cap stocks, International equities and corporate bonds.
Whilst small-cap equities have outperformed timber in the long-term, after factoring in risk (as reflected inside the Sharpe Ratio), timber has exhibited the highest risk-adjusted returns of the major asset class. As compared to the S&P 500, timber has displayed a minimal risk characteristic. Since its 1987 inception, the NCREIF Timberland Index has fallen in just 12 months: – 5.25% in 2001, concurrently, the S&P 500 has fallen four times, including -22.10% in 2002.
One of the many reasons investors, especially large institutional investors, utilize timber, would be the fact the asset displays low to zero correlation with other assets, especially those related to financial markets. It is often demonstrated on the long time that adding timber with a portfolio of investments has got the effect of improving overall risk-adjusted returns. This low correlation reflects the reality that the primary driver of returns-biological growth-is unaffected by economic cycles.
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