Wednesday, April 20, 2011

Timberland after the Recession?

How Timberland has as an asset performed through the recession and what is the outlook for the future?
Since timberland started to sell to investors in the late 80’s and early 90’s, it’s performance as an asset class has gone up and done due to many factors, such as supply, global influences, changes in the economy, etc..  One of the most negative factors on timberland is the decline in saw timber prices, due primarily to the decline in housing starts.  So, I started looking around for economic opinions as to when a recovery is expected, attending seminars and reading various articles.  The consensus seems to be that the recovery will be modest over the next few years.  As the population grows there will be a demand for more housing, whether it is for multifamily or single family dwellings.  Given this increase, saw timber values are expected to gradually increase.  No one is expecting a return of the housing boom as we experienced in the middle of the last decade or the high stumpage values that we enjoyed around 2000.  A long term trend either up or down is not expected for pulpwood.  There is a lot of talk in the industry about using wood for fuel on a significant level, such as power plants or exports.  If this occurs, it will help with the demand and price for biomass, whether it’s a clean or dirty chip.  However, I believe this is still something on the distant horizon.  To develop the technology and then build the infrastructure to support it will take time. 
What am I seeing in today’s Marketplace?
I am constantly checking website activity and talking with my peers to get a feeling on the markets.  I’m seeing activity: webpage clicks, emails, phone calls at a level almost as high as when the markets were strong.  However, there is a significant decrease in actual purchases.  People are being very careful and are shopping price, which is the proper thing to do in this economy.  One item of misinformation that I’m hearing is the inability to borrow money.  The conventional banks still have restrictive terms, such as requiring 40% down; however, the land banks that specialize in loaning money to buy land are actively pursuing loans and have good terms.
So what should an Investor do when considering investing in Timberland?
The simple answer is “Do your homework.”  The expected returns for timberlands may not be as high as they were five and ten years ago, but there is still a decent return to be made.  My first advice is to accumulate knowledge.  You can do this in one of two ways: (1) you can go about the process of educating yourself, or (2) you can hire an expert.  I’ve seen both methods work successfully.  I’ve met a few landowners who were very knowledgeable about investing in timberland and set out a plan and implemented it accordingly.  I also know landowners who are successful and they know relatively little about investing in land.  They hire and trust an expert.  Sadly, I’ve seen many landowners who rushed into decisions without doing their due diligence and make mistakes that can be long term, primarily an ill advised timber sale.   One problem with timber is revenue is generated obviously from selling timber and the sales are a long time apart because of the time it takes to grow trees.  An ill advised or poor timed timber sale may take a generation to recover.  In summary, timberland still remains a strong asset class.  Return may not be as high as past but none the less it still has positive attributes such as: an inflation hedge and stable returns providing the investor does his homework accordingly. 

Click here to see timberland for sale in Alabama.
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