Timberland Return Drivers and Timberland Returns and Risks: A Simulation Approach

摘要

Timberland assets exhibit several unique characteristics that are attractive to investors. In this study, we examined the three return drivers of timberland investments—timber price change, land value appreciation, and biological growth, in two settings. Timberland returns in the past 15 years were analyzed via a hypothetical loblolly pine plantation bought at age 10 years and sold at age 25 years. Results revealed that timber price had a negative contribution to the total returns. With declining timber prices, annualized average returns dropped from 14.31% for 1982-1997 to 6.88% for 1995-2010. Looking forward, timberland investment returns in the next 15 years were simulated by Monte Carlo simulations with both random and mean-reverting timber prices. Expected mean returns with random timber prices were found to be 8.35-10.16%, and those with mean-reverting timber prices were 7.25-8.56%. Returns with random timber prices were more volatile. Despite different time periods under investigation and timber price assumptions in the simulations, biological growth was identified as the dominant contributor to the total returns. However, timber price assumptions affect values of timber cut contracts, timberland liquidation values, and default risks of leveraged timberland investments.