As the world of timberland investment continues to evolve, staying on top of market trends, required returns, and environmental considerations is as critical as ever.
As part of Sewall Forestry’s ongoing commitment to provide valuable insights into the timberland investment sector, we conduct an annual survey to gather data on emerging trends, investor behavior, and the factors shaping the market. At the recent University of Georgia Timberland Investment Conference, I had the opportunity to share insights from the results of our 2024 survey, focused on some of the dynamics of timberland investment, including geography, climate risk, carbon offsets, and how to approach required rates of return. This post highlights key points from my presentation that are shaping timberland investment.
Timberland’s Resilience: How Shifts in Risk-Free Rates Impact Required Returns
The required rate of return for timberland investments is influenced by several factors. A major factor is the risk-free long-term real (net of inflation) Treasury rate, which serves as a baseline for assessing the minimum return expected from an investment. Over the years, timberland investments have generally followed shifts in long-term risk-free real rates, with timberland’s rate changes delayed and muted relative to real long-term Treasury rates.
When the Capital Asset Pricing Model (CAPM) is applied to timberland, the required return for timberland is primarily driven by changes in the inflation-indexed return offered by long-term Treasuries. Notably, the variability of timberland’s return relative to equity markets has been steadily decreasing. With this metric, at a new low of 0.08 for 2025, volatility in the equity risk premium has minimal impact on timberland’s required return, making timberland increasingly desirable from the CAPM’s perspective.
Geographic Variability in Timberland Investment Returns
Geography remains a significant factor in timberland investing. While discount rates have declined in some regions, others have held up, reflecting both investor demand and risk perceptions.
In the US, regions like the Northeast and Great Lakes have seen a notable rise in investor input to our survey and indicate a premium of ~50 basis points to the more heavily invested regions. This shift in regional interest points to the importance of understanding market dynamics before investing.
Internationally, specifically in Australia and New Zealand, timberland investments continue to offer relatively low premiums to the US, indicating investor confidence. Brazil remains a higher-risk market, with risk premiums for some forest types fluctuating in tandem with broader economic risk measures.
The Impact of Carbon Offsets on Timberland Valuation
As sustainability stays front-and-center, carbon offset agreements can influence timberland valuation. In fact, timberland with existing carbon offset agreements is now priced with an additional ~100 basis points in the discount rate, per our survey. This increase reflects monitoring costs and risks of reversal. Investors are split as to whether carbon agreements complement traditional forestry or could disrupt the incentives for timber quality that have historically driven forestry. As the role of carbon credits evolves, future surveys may generate more insight into these projects.
Climate Change and Its Impact on Timberland Valuations
As climatology improves, investors must consider the risks posed by natural hazards, growing seasons, precipitation patterns, and carbon dioxide levels. According to our findings from the Sewall Forestry 2024 Investor Survey, most active investors are now adjusting their valuations to account for climate risks, particularly by altering their discount rates. This recognizes that natural hazards can affect timberland operations and returns.
Interestingly, a sizable minority of investors do not adjust valuations for climate risks, perhaps awaiting more clarity on how best to incorporate these risks into their valuations.
Global Timberland Investment Trends: Insights from the Sewall Forestry 2024 Survey
The Sewall Forestry 2024 Investor Survey provides a comprehensive overview of international timberland investment markets. Some key insights from the survey include:
- US Timberland: US timberland discount rates leveled off in 2024 after decreasing from 2021-2023. Responses tightened, indicating a more consolidated view of the central tendencies of required returns.
- International Markets: In regions like Australia, New Zealand, and Brazil, timberland investments continue to offer higher expected returns, although some international markets have seen their risk premiums fluctuate with broader economic uncertainty.
Despite rising, the real risk-free long-term rate in the US has had little impact on recent timberland pricing. This has narrowed timberland’s spread over the US risk-free long-term rate, while the spread in many developed markets is wider because their long-term interest rates are lower.
Conclusion: Looking Ahead to the Future of Timberland Investments
As we look ahead, timberland investment strategies will continue to evolve, shaped by global economic shifts, environmental opportunities, and other forces. Geography, climate change, and the growing importance of natural capital are just a few of the factors that investors consider when evaluating forest investment opportunities. By understanding these trends and incorporating them into decision-making, investors can navigate the opportunities of investing in an asset whose returns have little correlation to the stocks and bonds that comprise much of their portfolios.
At Sewall Forestry & Natural Resource Consulting, we remain committed to providing expertise on timberland valuations, investment research, and forest due diligence. If you’d like to learn more about timberland investment trends or need expert support for your timberland, don’t hesitate to reach out.