Why Timberland is an Attractive Alternative Investment
The following are some of the reasons why timberland makes a good alternative investment for investors looking to diversify their portfolio of investments:
Ease of investing
Becoming a timberland investor is a straightforward process, and investors can achieve this in two ways. The first option is to acquire forest land directly from the owner. It requires a high capital input since the investor will be acquiring the trees and the land itself where the trees are planted. An investor can finance the land acquisition using a mortgage obtained from a financial institution.
The other alternative is to purchase shares of real estate investment trusts (REIT) that focus on timber. REITs invest in the real estate industry. They allow investors to purchase shares in public exchanges in order to become part-owners of a company. The capital input can range from a few hundred dollars to millions of dollars, depending on what the investor can afford. The revenues earned by the REIT from selling trees and forest land are then distributed to the investors as dividends.
Price appreciation
Stocks are volatile by nature, requiring investors to keep abreast of the happenings in the financial markets to know when to buy or sell their stocks. The only proof that investors own the shares is the stock certificate, and it can be devalued during periods of hyperinflation.
On the contrary, timber is a limited physical product that has experienced a steady price appreciation over the years. The price appreciation directly correlates to the increasing demand for timber, which is an important material in the construction industry.
The growth of the housing market offers an advantage to timberland investors who are banking on the biological growth of the tree plantations to meet the demand, and, in exchange, earn a return on their investment.
Biological growth
One of the attractive features of trees is that they grow physically. They increase in weight and density on a consistent basis from one year to the next. The growth is dependent on various factors such as climate, type of soil, species, etc.
In addition, better site conditions and proper tree management will improve the annual growth rates of the trees in the plantation. The US Forest Service uses a model that predicts the growth and model for different species of trees in various states.
Land appreciation
Land appreciation is the increase in the value of land over a given period of time. Historically, land has been known to appreciate at a slow pace, but there are certain things that landowners can do to increase its value.
First, having a well-maintained forest with a good road network in a high population area can attract a high value. The forest land can be leased for use in recreational activities such as camping, hiking, hunting, etc. When the trees have matured, they can be harvested, and the land can be converted into an industrial park, golf course, or even a shopping mall.
| Number of model | SPS with timber trees |
|---|---|
|
Model 1 |
Timber trees in fences |
|
Model 2 |
Timber trees under natural regeneration in natural grassland with fattening livestock production system |
|
Model 3 |
Secondary regeneration forest (tacotal) enriched with timber trees in degraded grassland |
|
Model 4 |
Planting timber trees in a perpetual system in improved grassland with fattening livestock production system |