Investment Attributes

A key attraction of investing in timberland is its history of producing competitive risk-adjusted returns.

Timberland investment returns are primarily driven by the growth and harvesting of timber in working forests and by changes in the value of the underlying lands upon which that timber is being grown.

The primary benchmarks used to measure private U.S. timberland investment performance are managed by the National Council of Real Estate Investment Fiduciaries (NCREIF).  They include:  The NCREIF Timberland Property Index, which measures property-level performance on a gross and unlevered basis; The NCREIF Timberland Separate Account Index, which measures before and after fee performance for individually-managed accounts; and, The NCREIF Commingled Fund Index, which measures before and after fee performance for pooled accounts.  These three indices are comparable to other such benchmarks managed by NCREIF for other commercial real estate asset classes, including U.S. farmland.  Timberland investment management organizations (TIMOs), like TIR, that contribute their performance data to NCREIF for inclusion in the indices are allowed to utilize the data to educate investors about the timberland asset class and to promote their own capabilities.

Sources: Standard & Poor’s, NCREIF, United States Treasury
Time-weighted average annual returns
*The Sharpe ratio assumes a risk free rate of 2.79%, which is the rate of 1-month U.S. Treasury Bills from 1989-2023.

Time-weighted average annual returns
Sources: Morningstar/Ibbotson, NCREIF, Credit Suisse

Time-weighted average annual returns
Sources: Morningstar/Ibbotson, NCREIF, Credit Suisse

Aside from offering competitive risk-adjusted returns and portfolio-diversification benefits, timberland also has other unique characteristics that institutional and high-net-worth investors usually find attractive. Among others, these include ongoing value accretion due to the biological growth characteristics of trees; the flexibility to structure and manage investments in response to an investor’s specific risk, return and cash-flow needs; and, the ability to capitalize on certain tax advantages.

Foresters often describe timberland assets as having characteristics that make them analogous to both a factory and warehouse.  That’s because a timberland holding produces a product, timber, that naturally increases in value through time because of biological tree growth.  However, that same forest also can behave like a warehouse because it provides the capacity to store that increasing value on the stump until supply, demand and pricing dynamics are advantageous for realizing cash flow.

Timber is an asset that naturally increases in value through time because as a tree increases in size and volume it tends to become more valuable.  This is because larger trees are typically used to produce higher-valued products.  In many parts of the country, for instance, softwood trees, like pine and fir species, which are often grown in intensively-managed plantations, move through their financial value chain as they grow through their biological life cycles.  Trees that are 8 inches in diameter or smaller are considered pulpwood, which is largely used to manufacture low-value products like paper and packaging.  Pulpwood also is a common feedstock for bio-energy applications, like renewable fuel pellets.  Trees between 8 and 12 inches in diameter fall into the chip-n-saw grade.  Chip-n-saw logs are most often used to produce smaller-sized lumber (e.g., 2×4’s) and intermediate-value products like composite building panels, including oriented strand board, which is employed by builders and contractors for wall sheathing and flooring.  Finally, trees 12 inches or larger in diameter are considered sawtimber.  They are used to manufacture high-value products like dimensional lumber, plywood, paneling, flooring, furniture and decorative veneers.