Who says money doesn’t grow on trees! Some environmentally conscious investors are proving that trees actually do produce money. They’re putting their real estate investment dollars into timber. But, like any money-making venture, there are both risks and rewards.
Timber investing has typically been limited to large pension funds and institutional investors who have huge amount of cash. But now, there are many more options for individual investors who see value in timber — especially in the wake of the financial crisis that has now produced a huge building boom.
Investing opportunities for individuals include limited partnerships, real estate investment trusts or REITs, crowdfunding ventures, ETFs and the purchase of stock from any publicly traded timber company. If you invest as an individual, and buy your own grove, Investopedia says you’d probably need a minimum of about $1 million.
When it comes to protecting your portfolio from market fluctuations, it’s good to have several cards up your sleeve — some financial advisors feel that timber is a good candidate. It’s considered green and sustainable, with increasing demand around the world, and a low risk of losing value. As a value play, it’s also a good hedge against inflation.
Investopedia lists five reasons why timber helps you build wealth:
1 – Demand for timber is increasing both for construction and for paper products.
2 – Timber is a hedge against inflation as an asset that literally gains value as it grows.
3 – Returns on a timber investment can beat stocks over the long-term.
4 – Timber prices are not affected by the same market conditions as most assets and are therefore insulated from market volatility.
5 – The land used to grow timber also appreciates.
A recent article in Zacks described three reasons that timber is a good investment right now. One is that same “hedge against inflation” I mentioned in the previous list. It says that U.S. consumer prices rose 2.1% year over year in December 2016. As of February this year, it says a popular ETF represented by the ticker CUT was already up 5.2%. (If you are interested, Zacks recommends that one, and another one with the ticker WOOD.)
Zacks also says that trees provide more stability in value. If prices are high, you can harvest more. If prices are low, you can harvest less. Or if prices are lower for lumber but higher for paper pulp, you can harvest for paper. If you want to leave the asset alone, it grows in value, literally, “on the stump,” and prices won’t fluctuate as much as other assets.
The blog also says that timber is reaping the benefits of the housing recovery and the current building boom. You have people remodeling, fixing and flipping, and building from scratch to address the housing shortage. All that activity is increasing demand for lumber.
But, there’s always a flipside to consider. Some naysayers out there feel that timber is very risky. Here’s why:
According to news source Deutsche Welle out of Germany, the “risks are high” and the environmental benefits are “questionable”. It says that financial companies are “going all out” to entice investors to put money into timber. They are promising green returns that actively support the environment, and for the investor, 100% security. That should be a red flag right there. No investment is ever 100% guaranteed.
It writes that interest in green investments grew during the financial crisis, especially for investments that promise reforestation and forestry management. People were attracted to all the positives of timber and the investment options were there. However, DW writes that it’s not the easiest investment strategy to execute. For one, you have to lock up your money for a long, long time. It usually takes about 20 years for the investment to really pay off because investors have to wait decades for trees to mature.
At a recent real estate conference, a fellow investor was talking about his own investment in “teak”. He looked at the extended time frame as a positive because he wasn’t planning to reap the rewards himself. He put the money into lumber as a “generational investment” that would pay off for his children and grandchildren.
DW also writes that many tree plantations have been planted in recent years, and with a 15 to 30-year window of time for tree maturity, depending on the type of tree you are growing, there’s not a long track record for the tree farming investment business. The article says that anticipated returns are pure speculation and that calculations are often based on an “overly optimistic outlook.”
It also said that some of the valuation is based on land appreciation, and that to collect those returns, the land would have to be sold. There are also risks from storms and insects that could decimate a crop.
The article also mentioned doubts about the ecological aspects of tree farming. It says that many farms are huge monoculture plantations that do not provide any protections for biodiversity, water use, or soil degradation.
It says some trees have more of an impact on their environment than others. Eucalyptus is one of them. It’s grown in South Africa and Brazil and needs a lot of water. DW says it can literally “suck the ground dry”.
Evaluating Timber Investments
Ecologists say it’s better to grow a mix of trees and bushes, and create a more diverse environment. DW says it’s also good to know how the land was used before it was planted with trees. If it was previously used to grow food, then clearing it for timber may not be ethical. But, if it was degraded in some way, and the trees serve as an improvement, and the plantation creates jobs, then it’s providing a more positive social impact.
If you are an investor and you are concerned about the sustainability of a timber investment, you need to do your research. DW says that due diligence should also include questions about the transparency of the company, whether it explains the risks involved, and if insurance will cover potential damage to the crop, or losses.
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