Losses due to nature – Physical risks can vary by region and generally include such events as fire, tornado, hurricane and forest pests, including pine beetles. Historically, the average annual loss for physical risks is less than 1%.1
Overpayment – An economic risk of concern is using too much debt leverage and/or paying too much for a timberland property. If this occurs, the investment suffers a negative impact that is very hard to overcome.
Political and environmental pressures – Outside of the Western United States, action from political and environmental groups has not traditionally been a major factor due to the large base of private timberland ownership.
Decreased consumer demand – The demand for timber can be impacted by factors such as a decline in housing starts, substitution of other finished products such as steel or various recycled materials, and substitution of other raw products such as export substitution from other countries. These factors can be offset by population growth increasing the overall demand for wood products.
Site quality, land management and value risks – Most TIMOs have relationships with third-party forestry experts. However, to minimize risks associated with land and timber quality and maximize investment returns, it is advantageous to partner with a TIMO that has qualified experts on staff.
Poor local markets for products – Many areas with expansive timberlands have few nearby production markets. Overhead costs related to transporting harvested timber to mills negatively impact profits. We have the in-house ability to evaluate local mill density for wood products, which promotes competitive pricing for the products harvested.
Other risks – Risks, such as short-term price volatility, interest rate fluctuations and the lack of immediate liquidity, should be considered in your investment decision.
1 Source: Stats of major TIMOs, REITs and Weyerhaeuser per James W. Sewell Company.