It seems that most of the commercial US timberland in private ownership is changing hands. In fact, over 19 million acres has changed ownership in the last five years, and about four million acres are expected to follow in 2004.

But what is driving this change and will it continue?

Industrial owners have historically owned timberland for a dependable supply of raw materials. Land was cheap, with little competition for large ownerships outside the forest products industry. As such these companies were in the business of building and maintaining their land bases.

This began to change in the early 1980s, notably with the acquisition of the Diamond business by Sir James Goldsmith, who proceeded to break apart and sell the various assets of the company separately, including the timberland. The separation of the land from the mills caused the forest products companies to recognise that direct ownership of timberland was not essential to the business of manufacturing forest products.

Global competition, as well as a tough market for paper products has increased the pressure to divest timberland assets. Mills in the US compete against other parts of the world with lower labour costs and fewer environmental restrictions. Timberland became an easy source of capital for mill improvements. The merging of major companies like International Paper/Champion and Mead/Westvaco has also created subsequent debt problems, providing further incentive to sell. As a result there has been a steady decline in land ownership by the forest products companies that continue today.

Most of the lands sold by these businesses have been purchased by institutional investors. Encouraged in no small part by Goldsmith, investors emerged in the 1980s who began to view timberland as an investment asset class in its own right. Companies such as John Hancock, Travelers Insurance, and Prudential began pooling funds, and today’s “timber investment management organisations” or TIMO’s are the result.

Initial investments were mostly in the southern and western US and were softwood oriented. Eastern hardwood investment did not really become significant until the mid-90s but has quickly gained considerable ground.

The growth of this type of investment has been dramatic. From about US$30m (£16.5m) in 1982, investment in timber has grown at a compound annual growth rate of 33% to over US$11bn today. Since just 1999, forest industry ownership has declined by over 11%, while timberland investment acreage has increased by 34%.

Timberland investments have performed well in recent years, posting solid returns with minimal volatility. However, as anyone with a pension plan can tell you, other investment asset classes have not performed as well, and in fact have lost significant value. An obvious consequence is that funds containing significant timberland found themselves over represented in this sector as an asset class and moved to re-balance the mix by selling. Added to the lands available through the forest products industry, this trend gave the appearance of a land surplus on the market through most of 2003.

But, with rebalancing now mostly completed, sources of available investment grade properties are dwindling, increasing competition on remaining available properties.

Best performers

Competition is increasingly strong for eastern hardwoods. Prices for high quality hardwoods have been performing especially well in recent years, and are less vulnerable to short term fluctuations than the commodity-oriented markets for softwoods. Quality hardwoods are virtually always found in natural stands rather than plantations, and are currently getting a lot of attention from conservation-driven buyers. Also, the currently weak dollar makes this type of investment increasingly attractive to European investors.

What is the outlook? It appears highly likely that forest products companies will continue to sell off land assets but at a declining rate, and institutional investors will continue to be the primary buyers. With increased awareness of timber as an asset class, the capacity for investment growth is enormous. Public and private pensions alone represent close to a US$4trn market and many analysts see timber investment swiftly and substantially increasing. Demand for quality forestry investment is clearly rising more rapidly than properties are entering the market, and it would appear that the recent surplus of land on the market is quickly becoming a shortage.