How to value the great southern timberlands

The Australian and New Zealand timberland markets are opening up in a big way. And because the investment environment for the assets in these countries is much less efficient than in the US, there are opportunities to buy good assets cheaply. But Eugene Snyman of Cambridge Associates says managers with a local presence will drive the best deals. Simon Mumme reports.

Timberland is an entrenched investment exposure for many US institutions. It became popular in the 1990s, and after “two solid decades” of transactions, most deals now involve professional investors, making the market more competitive and driving prices south, Snyman, managing director of Cambridge Associates in Australia, says. But the situation is vastly different on the other side of the globe.

Snyman says that in the next five years, at least 2 million hectares of timberland should be released to the Australian and New Zealand markets as state governments, distressed corporations and managed investment schemes continue to divest holdings. Such a surge in supply, coupled with a small amount of managers in the market, naturally creates better pricing opportunities for investors.

“Outside the US it’s a less developed opportunity. Fairly inefficient markets exist in pockets of South America, but the most prudent opportunity set persists in New Zealand and Australia,” he says

“If one was to extrapolate, this opportunity is where the US was a decade ago.”

The next five years will be crucial for these growing timberland markets. While there is a “relatively small number” of Australian and New Zealand managers capable of extracting great value from the incoming opportunities, many managers, local and global, will be deploying funds, and “it’s crucial that they get prices right,” Snyman says.

The prices they pay must accurately reflect the quality of the timberland and plantation management, but also the type of wood on offer and its commercial appeal.

To ascertain this, they need local know-how. So despite their experience, “global timberland managers that only have a presence in the US, and fly-in, fly-out of Australia will be at a disadvantage,” Snyman says.

He has seen offshore managers fly in to Australia and out-bid local players to get deals. “But timberland requires patience,” he says. “The supply coming on in the next five years will be significant, and we’ll be watching assets trade at higher prices. So we think managers with a presence on the ground will have an advantage over global managers who don’t.

“They will be looking at some assets coming to market – and not only on the quality of timberland and management, but also access to market.”

Currently, there is a “handful” of timberland managers in Australia and New Zealand with adequate experience and resources on the ground. Some global managers, with regional staff plugging them into timberland markets such as the US, Latin America, Australia and New Zealand, will also know the correct values of the coming deals.

In Australia, the market exits for timberland assets are mainly the domestic housing, pulp, furniture and biomass industries. Most of New Zealand’s commercial timberland, concentrated in the North Island, has been harvested to feed Chinese demand for housing supplies ever since Russia bumped up its tariffs on wood exports.

Managers can also use timberlands to “eke out” other sources of revenue, such as livestock grazing and wind turbines, Snyman says. “But the core remains the forests themselves and managing these assets.”

In pursuing these returns, managers must also mitigate risks, such as fire and disease, and determine the best times to harvest. Later on, the need to ensure timberlands are reforested so they meet their full commercial potential. It follows that timberland portfolios should be diversified by geography – to minimise risks – and by type of wood and their commercial uses.

Like direct property and infrastructure, timberland is used as an inflation-hedging real asset. Its yields are low in the early years following investment, but steadily increase further along the timeline. Snyman expects well-managed Timberland assets in Australia and New Zealand to generate real returns of between 8 per cent and 10 per cent over their lifetimes.

The illiquidity and return profile of timberland resembles private equity, with horizons of 10 or more years. Some managers hold plantations for 20 years, Snyman says – but there is always the opportunity to sell assets at the right price during this period.