TIR Research Library

Chung-Hong Fu: Managing Director Economic Research and Analysis

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The threat of climate change is one of the most pressing issues facing the global community today – and investors are playing an important part in addressing global warming through both their investment activities and the environmental, social and governance (ESG) policies they are embracing.  One obvious way for investors to influence climate change is by investing in sustainably-managed timberlands.  Forests are natural accumulators of carbon dioxide, the greenhouse gas (GHG) scientists believe is most responsible for global warming.  As a result, large and active markets have emerged across the globe where units of sequestered carbon (carbon offsets) are priced and traded.  This is increasingly providing timberland investors with opportunities to generate enhanced financial returns from their assets and to simultaneously play an important role in helping to mitigate global climate change.

In “A Timberland Investor’s Perspective on Forest Carbon,” Chung Hong Fu offers an introductory primer on the role carbon offsets could play within a broader timberland investment strategy.  The paper also explains how carbon offsets (often referred to as carbon credits) are generated by forest assets; what is required to account for them and package them for sale; and under what circumstances it could be beneficial for a timberland investor to sell carbon offsets in one or more of the global cap-and-trade or voluntary markets.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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Infrastructure funds are raising tens of billions of dollars as investors seek to build out their real-asset allocations.  Institutions are attracted by the large investible universe, the diversity of opportunities, and the potential returns.  While we believe that each asset class has a specific role to play within a portfolio, inevitably there will be comparisons.  In “Trees and Toll Roads: Comparing Timberland and Infrastructure in a Real Assets Portfolio,” our Economist, Chung-Hong Fu, provides some background and quantitative data on infrastructure investments and how they compare to timberland.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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Some timberland investors have expressed concern that softwood sawlog markets in the U.S. South, the largest investable timberland region in the world, have languished since the fallout of the U.S. housing market in 2007. This extended downturn in southern sawlog markets is important to investors because timber prices are a significant driver of timberland returns.

In “When will Southern Sawlog Markets Recover?: Shaping Expectations of Timberland Investments in the U.S. South,” Chung-Hong Fu, Managing Director of Economic Research and Analysis at Timberland Investment Resources, discusses why, despite the long period of anemic pricing for pine sawtimber, there is reason for optimism — particularly for owners of southern timberland assets.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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This white paper discusses TIR’s strategic view of the macroeconomic factors that have challenged timberland investment since the “Great Recession.”  It also explains why the asset class has not recovered as quickly as other real assets and outlines the factors that suggest a more dramatic recovery may be imminent in the near term — especially in the US South.

With the release of this paper, TIR wants to make clear that we do not advocate market timing. In fact, Chung-Hong Fu’s previous white paper, “Capital Placement in Timberland,” outlined the significant benefits of temporal and vintage year diversification. With that said, our clients and their advisors expect us to have a current strategic view of the market and this paper reflects that view.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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Timberland investment management professionals often find themselves working with investors who are focused on building their portfolio’s exclusively with “core timberland” assets because they are interested in attaining “pure” exposure to the asset class.  Such investors often have limited appetites for acquiring timberland that also offers “higher and better use'” (HBU) attributes because they view such assets as being both speculative and unpredictable — and therefore capable of distorting their portfolios’ risk and return profiles.

Monetizing HBU values entails converting a timberland holding to other higher-value uses, such as agriculture, recreation, conservation or development.  In the attached white paper, Chung-Hong Fu, Ph.D., Managing Director of Research for TIR, provides an unconventional perspective on the underwriting risks associated with timberland investments.  His thesis is that more optionality — whether it is provided by HBU monetization potential or other Alpha-producing activities — can actually result in less volatile returns for investors.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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One of the first things investors learn about the timberland asset class is that it offers three primary sources of investment return: (1) biological growth; (2) timber price appreciation; and, (3) land price appreciation. In large part because of a popular article published in 1998 by Jon Caulfield and entitled, “Timberland Return Drivers and Investing Styles for an Asset That Has Come of Age,” many investors have embraced a generalized thesis about the relative importance of each of these return drivers.

In “Timberland Return Drivers: A Fresh Look Using Empirical Data,” Chung-Hong Fu revisits this topic using historical data derived from the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Property Index.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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Real assets have traditionally attracted investors because of their capacity to generate cash yields, like bonds, as well as their ability to generate long-term capital gains, like stocks. Within the real asset category of alternative investments, timberland often competes with farmland, real estate and infrastructure-focused investments for institutional investors’ attention and portfolio allocations. All four are considered long-term illiquid investments that can generate self-sustaining income in a core economic sector.

In “Timberland in a Real Assets Portfolio,” Chung-Hong Fu examines the arguments for investors to hold timberland in their portfolios and explores the forward-looking reasons timberland may be well positioned, from a return perspective, relative to the other real assets alternatives.