The vast majority of return on investment generated by timber hails from the biological development in sized the timber source, from seedling to sapling to fully fledged tree. supplies quadco teeth of, an individual tree’s amount of wood raises by between 2% and 8% yearly based on species, age and climate. On a erogenous level, this gives the tree owner more timber to offer over the years, and hence generates a larger return within the long-term.
Apart from this basic observation there is more to take into account, as trees yield a better sale price when they come to be bigger product classes. For instance, a tiny tree would basically be ideal for paper products or biomass for fuel, in which a larger tree can be harvested for sawn-timber which will fetch dramatically higher prices per tonne and could be employed for products like plywood or telephone poles.
A report by Professor John Caulfield of the University of Georgia discovered that biological growth counts for more than 60% of total financial returns, whilst increases in the expense of timber, and capital appreciation in the land are the cause of the entire content of returns produced by a timber plantation.
This holds to indicate that it’s an effective process to lease land on which to grow timber, as well as purchase outright as only 6% of earnings are produced from capital appreciation within the valuation on the land. This demonstrates fluctuations within the price per cubic metre or tonne of timber have limited affect on the overall performance of timber investments. Virtually all return is generated from the growth within the size of the tree itself.
The conventional benchmark for timber is The NCREIF Timberland Index, which increased 18.4% in 2007, versus a 5.5% rise for the S&P 500. In 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 from the long-term, after factoring in risk (as reflected in the Sharpe Ratio), timber has exhibited the highest risk-adjusted returns associated with a major asset class. In comparison to the S&P 500, timber has displayed the lowest risk characteristic. Since its 1987 inception, the NCREIF Timberland Index has fallen in mere twelve months: – 5.25% in 2001, simultaneously, the S&P 500 has fallen 4x, including -22.10% in 2002.
One of the primary reasons investors, especially large institutional investors, utilize timber, is the fact that the asset displays low to zero correlation with other assets, especially those linked to real estate markets. It has been demonstrated on the long time that adding timber to some portfolio of investments contains the aftereffect of improving overall risk-adjusted returns. This low correlation reflects the truth that the principal driver of returns-biological growth-is unaffected by economic cycles.
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