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Timber outperforms the stock market
For many investors, putting money into timber may seem somewhat novel, especially in South-
East Asia. But there is nothing new in trees as a credible asset class. Timber has a long and
profitable history, especially in the United States where trees have consistently produced better
returns than stocks and shares.
But the big point is that trees in the tropics have a growth rate that is eight to ten times
faster than those in cooler climates. Harvesting can take place many years earlier allowing a
better return on investment.
But back to the USA. From 1973 to 2003, managed timber in the US returned 15% per
year – which puts the projections listed above into perspective. Meanwhile, stockmarkets
returned about 11%. Just as important, timber did so with considerably less risk. Over the last
45 years, timber investments were down only three times against a dozen crashes in the stock
market.
Another advantage for trees is that throughout crises like the current credit crunch they
will keep on growing, and so does their value. Even when the timber market is soft, you can
simply leave the trees in the ground till it picks up again.
As well as the US, there’s a strong tradition of investing in timber in the UK, encouraged
by the government. Commercially managed woodland in the UK can be passed on free of
inheritance tax once it has been owned for only two years; it qualifies for capital gains tax
rollover relief ; and income derived from commercial woodland is free of income and
corporation tax. So a return of 5% from woodland is the equivalent of a return of over 8% from
any other investment to a higher-rate taxpayer.
Nonetheless, real soft timber prices in the UK are still 50% below those of 1996 though
that may be about to change. Over the last three years, prices have recovered by around 11%
(according to the FIM Timber Index) and that is a trend most experts see continuing.
From a South-East Asia perspective, notwithstanding markets in Europe and the US, there are
a number of reasons for investors to regard timber as an attractive asset class:
• Forestry is the only low-risk, high return asset there is.
• The price of timber has risen for the past 200 years.
• Timber is counter cyclical.
• World consumption is up 25 times over four decades.
Both the US and Europe will doubtless remain attractive to certain investors for some time to
come. But in Europe particularly, both the Scandinavian countries and the emerging states in
the EU, it could be argued that the market is relatively static compared to what’s happening to
the East.
The great growth in future will be in the East, notably China. According to the FIM
timber index, Chinese timber consumption doubled between 2000 and 2003, and its demand is
forecast to grow 30% in the next five years. The FIM says that global forecast demand is
“equivalent to finding another source of supply of timber with five times the output of the UK
each and every year”.
That is where the opportunities arise for the fast-rising countries in South-East Asia such as Malaysia.
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