When it comes to the world’s largest asset class, the wide array of investment options aren’t the only challenge for a would-be investor. By far, the highest barrier to entry is simply the enormous amount of capital necessary to participate in real estate. While the challenge of investment capital is fairly universal, even prohibiting many aspiring homeowners, nowhere is capital more of a challenge than commercial real estate.
Of course, for big ticket CRE assets like office towers and shopping malls, singly or in portfolios, the industry is increasingly enamored with the unparalleled buying and fundraising muscle of the REIT. Not only do REITs entice investors, they’re able to access debt in ways few others can, all of which has made them popular for numerous asset classes. Thanks to its effectiveness, the REIT concept has been expanding to other markets, those which may require us to redefine our own concepts of “real estate.”
Thus we have the timber REIT, the investment structure less focused on buildings than the land underneath (and materials they can harvest from it). Timber REITs seem far less explored than REITs in other sectors, so I had to do quite a bit of research into how these firms operate and adapt to the REIT structure.
When it comes to owning/operating thousands of acres of timberland, not to mention facilities to process and distribute lumber and related products, a great amount of capital is necessary. As a result, some timber companies (which were often more diversified beforehand) have been forced to adopt the REIT model. Just like multifamily or office REITs, however, timber REITs are susceptible to their own particular set of market conditions.
In his excellent Seeking Alpha article, Zvi Bar explains,
Historically, timber land has appreciated at a rate that outpaces inflation. This has made many who expect a coming bout of inflation to invest in timber acreage. Lately, though, just like most other commodities and natural resources… timber prices have come under pressure.
While the ’08 housing crisis led to a boom in multifamily, such was not the case for timber:
In 2011, timber prices increased, but they did so from a generally low price point. Prior [to] that, timber prices became depressed because demand for wood in new construction decreased so substantially after the real estate market imploded.
For REITs in general, a major selling point to potential investors has been the trusts’ recent performance in comparison with broader equity markets. Unfortunately, this has not been the case for the publicly traded timber REITs, which have trailed the Dow Jones and S&P 500 in recent months:
This chart (also from Mr. Bar’s article) shows the performance of the four public timber REITs and one timber-focused ETF.
To be sure, lumber for home construction isn’t the only source of revenue for timber REITs, but their other ventures (real estate, cellulose fibers, other wood products) may not compensate for the depressed construction market.
Still, despite their many U.S. holdings, timber REITs are among the most global of REITs. Consider Weyehaeuser (NYSE: WY), for instance. In addition to its holdings in the U.S., the REIT has property or operations in Canada, Australia and New Zealand, along with stakes in South American and Asian ventures. Further, it’s a significant exporter to the more recently booming Asian economies.
In the end, I suspect timber REITs’ global position will be to their advantage. Despite the recession’s effect on U.S. home building, international demand for timber and related products seems fairly unshakable. Fortunately, a suitable climate for tall trees is one of the few things America can’t outsource.
(For more on REIT investment and the natural world, see REITs of Nature part I, which I posted over the weekend)