Timber investing has become an increasingly popular alternative investment in recent years. There are several ways investors can gain exposure to timberland assets. Investing directly in physical timberland provides ownership and harvesting rights but requires substantial capital. Public timber REITs offer liquidity but lack timber rights. Private timber funds provideexposure with lower minimums but less control. Overall, timber can be an excellent diversifier and inflation hedge when included aspart of a broader portfolio.
Direct Timberland Ownership Provides Full Control But Requires Large Investment
Owning physical timberland outright provides full control over the asset and harvesting rights. However, acquiring enough acreage to provide meaningful diversification requires millions in capital. Smaller investors may partner in timber investment groups to pool capital. But direct ownership still involves hands-on oversight of forest management, harvesting, and marketing of timber products. Many investors opt to leave these complex operational aspects to professional timber management organizations.
Public Timber REITs Offer Liquidity But No Harvesting Rights
Public timber REITs like Weyerhaeuser provide exposure to timberland assets in a liquid, publicly-traded vehicle. But timber REITs act more as land holding and leasing entities. Investors own shares of the REIT but have no direct claim on the land or timber rights. The REIT leases land to operators who manage the timberlands and retain the harvesting profits. So public timber REITs provide passive exposure to land values, with dividends from lease income.
Private Timber Funds Allow Smaller Investment with Less Control
Private timber funds provide a middle ground for smaller investors, allowing investment in institutional-grade timberland assets with much lower minimums than direct ownership. But as limited partners, investors have no direct control over management of the assets. The timber fund general partner hires timber management organizations to operate the land. Private timber funds do provide timber rights and harvesting revenue passed through to investors. But the terms and strategy are set by the fund manager.
Timberland Provides Portfolio Diversification and Inflation Hedging
While returns vary based on timber fundamentals and broader asset valuations, uncorrelated timberland assets can enhance portfolio diversification. Timber values also tend to keep pace with inflation over time. Direct ownership or private funds allow participation in harvesting revenues. Overall timber can provide portfolio stability, though public REITs exhibit more volatility. Most experts suggest keeping timber allocation to less than 10% of a portfolio.
Timber investing provides exposure to real assets with unique supply/demand characteristics. Ownership of physical timberland, public REITs, or private funds each offer different paths to participate. But the complexities of timber investment merit thorough due diligence and consideration of professional timber management.