In Fall 2008 the Forestry & Natural Resource Consulting group at Sewall conducted its annual “Investor Survey” in which we queried active forestland investors for their views on matters related to timber and land market dynamics, non-timber values, and acquisition model inputs. The primary question out in the forestland market place is how prices and performance returns for forestland investments are responding to the global financial meltdown. More recently, we have collected additional thoughts and observations on the matter.
In the immediate aftermath of Wall Street’s plunge, many TIMO clients (i.e., pensions, endowments, foundations, high-net-worth investors) reported that they wished they had more of their portfolio in real assets, particularly forestland. In the aftermath of 9-11, forestland markets showed remarkable resilience compared to Wall Street investments. In some local areas, like northern New York, we actually saw rural and forest land properties escalate in value as investors flocked to real estate as a hedge or even as a place to retreat.
One hedge fund we interviewed expressed a contrary view. Generally speaking, hedge funds are much less risk-averse than most active timberland investors. They often deal in short-term equities and debt. This particular fund was chasing “sure bets” that promised 18-20 percent IRRs (e.g., by investing in highly discounted financial institutions). So, for them, the prospect of modest timberland returns was not very attractive.
The first half of 2008 was very active, with as many as 20 forestland investments on the market within the US alone at one time in June. Investors holding forestlands judged that discount rates had been bid down about as far as they could go, and the market was over-priced. Time to realize some gains! A number of deals were executed and prices continued to reflect discount rates in the neighborhood of 5 percent real.
When the economy collapsed, several large forestland deals in the US were in well under way and they closed at pre-collapse prices. Several new large offerings had just been announced. The largest of these have languished, and some have been withdrawn from the market because of lack of investor interest. One might argue that forest owners are not quite ready to “bury the dead” by settling for lower prices. Some investors have decided that they are officially out of the market on the buy side until things settle down and prices return to levels that will support reasonably attractive returns without overcutting and intensive parcel sale efforts.
From 2006 to early 2008, TIMOs amassed huge amounts of capital to allocate to forestland investments. While some of this money has retracted, much of it remains in place. There is not a great deal of property on the market now, so prices could remain reasonably high while this capital is put to work. But with any significant volume of offerings during 2009, investors for the most part are expecting discount rates to rise a bit, reflecting increased perceptions of risk going forward, or perhaps the need to generate better returns with fewer dollars.
A certain amount of forestland trade in 2008 was driven by term limits on closed-end funds. This has provided impetus for some of the TIMO sales. The same TIMOs have been active on the buy-side in the aftermath of these sales. REITs have also been active, generating income from sales and jumping over on the buy-side to shelter gains under 1031 exchange provisions. This back and forth trading amongst TIMOs and REITs will likely foster much of the activity in 2009.
Portfolio mangers in the past have been pushed to sell forestlands when these assets fared better than other portfolio components and caused an overweighting on the timber side. However, there are now indications that TIMO clients are trying hard to find liquidity in non-timber assets and are less concerned with “over-allocations” to timber. When the economy rebounds, timber prices will float with the rising tide and vindicate the decision to stay in timber. Most of our clients are not expecting any sort of wholesale flight from forestland assets, even though timber and HBU prices have weakened significantly in the past six months.
Finally, ongoing efforts by TIMOs to populate investment funds
with capital have slowed but not stopped. Some investors have pulled
out, but this has merely extended the period over which funds are
raised. We expect there to remain significantly more capital than
available deals, and for forestland to outperform most other assets
as we struggle through economic recovery.
ContactBret Vicary, PhD, MAI
207 827 4456