The challenges faced by Finnish forest owners were highlighted in recent news reports. Finnish investors should turn their attention to foreign forests, which may offer clear advantages, including the potential for better returns than domestic forests.
There are four things that make foreign forests attractive investments. The first is that trees grow faster in the more favorable growing conditions and climates, which can enhance returns. A rule of thumb in forest investment is that around 60% of the return comes from the growth of trees. For example, pine forests in the USA can grow three times faster than in Finland, and in Brazil the growth rate of planted pine is even faster.
Tree growth is also independent of the market and harvesting can be postponed in weak market conditions. This factor creates good capital preservation characteristics for forest investments, asset values tend to be maintained even during economic downturns.
Recent press coverage reported that roundwood prices in Finland have developed poorly in real terms, while asset prices have risen dramatically in a relatively small market. Finns looking to buy forests as an investment, may find their return expectations difficult to meet.
US forestry is an alternative to Finnish forest investments. With the largest transaction market in the world, capital can be invested efficiently and with good results. NCREIF, the most widely used benchmark for US forestry, retuned 12.9% in 2022 and 9.2% a year earlier. The historical 30-year return has been 8 percent annually.
Versatile diversification options
Another advantage of foreign forests is the wide scope for diversification. An international portfolio can diversify its investments not only by tree species but also by geography.
The old adage about not putting all your eggs in one basket applies also to forestry. Well-diversified forestry investment portfolios have typically exhibited low volatility and offered attractive risk-adjusted returns through economic cycles.
Strong inflation protection is a third advantage of forest investments. Forestry returns are highly correlated with inflation, so forest investments are a good inflation hedge for an investment portfolio. US forestry returns have outpaced inflation by at least 250 basis points for every 10-year investment period since 1960.
Wood is a versatile material with many end-uses. Prices track the broader economy, as commodity prices increase, so do timber prices. Supply is largely fixed; prices cannot be easily undercut by turning on new sources of supply. Higher pricing tends to persist.
Forest investments help meet climate goals
As a bonus, forest investments are an effective solution for reducing the carbon footprint of an investment portfolio. As legislation becomes more stringent on this issue, the requirement to take environmental considerations into account is also becoming more common.
Forest investment can contribute to the achievement of the UN Sustainable Development Goals (SDGs), in particular climate action, responsible production, biodiversity, reducing soil erosion, regulating clean water supply and rural economic development.
To achieve these goals, forests must be managed in a sustainable way. Forest certification, based on independent auditing, ensures that forests are managed in a way that conserves biodiversity, benefits local people and workers, and ensures forests’ economic viability.
Watch the video about forestry investments:
Video: Evli Alternative Insights - Forestry
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