Housing Recovery Expected in U.S.

A record crowd of 400 timberland owners and managers, forest industry representatives and investment professionals from 14 countries and all across the U.S. recently assembled at the University of Georgia’s 2011 Timberland Investment Conference in Georgia.

Highlights of the conference included:

  • Housing starts are expected to double by 2013 and a remodeling recovery is under way. While the high inventory of housing and weak demand are continuing to overshadow the recovery, Kermit Baker, senior research fellow at Harvard University’s Joint Center for Housing Studies, was cautiously optimistic. He predicted a gradual recovery in housing from 587,000 housing starts in 2010 to about 1.4 million housing starts in 2013. Recovery in the remodeling sector, which represents 70& of all construction spending, is already under way.
  • The global demand for wood is increasing. While the U.S. is the biggest producer and consumer of logs and lumber in the world, Dr. Jack Lutz, Forest Research Group and UGA Center for Business associate, looked at the growing demand from other areas around the globe. China was the world’s biggest importer of logs in 2009, but consumption is not necessarily related to increased demand. U.S. exports of logs to China from the Pacific Northwest are up significantly, but it is primarily due to tariffs on logs from Russia, the world’s biggest exporter of logs in 2009, not an increase in demand.
  • Forestry research and development is improving yields but yields could be even higher. Genetic improvement represents 23% of the improved yields from managed forests vs. natural stands, noted Dr. Clark Binkley, International Forestry Investment Advisors; however, he thinks yields could be higher. While for-profit research firms are still focused on genetic improvement and varietal forestry, he noted a decline in spending on forestry research and development in the U.S. in the past decade.
  • Timber as an investment is continuing to grow even when the economy isn’t, as it’s a relatively low-risk investment that consistently provides returns from harvest.

Ken Hines of John Hancock’s Bond and Corporate Finance Group noted that Hancock is bullish on the long-term outlook for timber because timberland is a finite resource that appreciates biologically and economically, that provides flexibility to adjust to cyclical markets, and that has multiple cash-flow sources.

Others facts and figures from the conference:

  • Despite record housing decline, residential markets still account for a dominant share—63% in 2011—of softwood lumber demand, compared to 67% in 2005 before the housing downturn.
  • Remodeling and home improvement spending is almost 70% of total residential activity since the downturn and represents a $300 billion market.
  • The total value of investable global private timberlands is $120 billion, two-thirds of which are in the U.S. The best spots for timberland investment continue to be the U.S., then Brazil, followed by Chile, Australia, Canada and New Zealand.
  • The U.S. was the biggest consumer of wood in 2009 and was also the biggest producer of logs and lumber for that same period; however, consumption was much lower than normal. Russia was the world’s biggest exporter of logs in 2009, but volume is declining due to log export tariffs. China was the biggest importer of logs in 2009.
  • Global institutional investment in timberland is estimated to be $6 billion, about 30% pension funds, 23% mutual funds and 20% insurance funds, with the balance split among sovereign wealth funds, hedge funds and private equity. The U.S. still dominates institutional/financial timberland investment, but this may change. Behind the U.S., New Zealand, Australia and Brazil are still the predominant recipients of non-U.S. timberland investments.
  • Timberland investment options have grown significantly in the past few years. There are now 20 TIMOs based in North America, four publicly traded REITs in the U.S., two investment vehicles in the United Kingdom as well as several Chinese forestry companies.
  • 2010 was the slowest year for U.S. timberland sales in recent history. Only 10 transactions totaling 355,000 acres were completed. This compares to a high of 33 transactions and 5.3 million acres sold in 2006. The role of real estate or “other” uses of timberland has diminished and timberland values are moving back to historic fundamentals that define Value as Land + Timber + Improvements. Timberland owners would rather hold property than sell at diminished values.