The past 12 months have been interesting for investors. The general rule has been caution rather than the exception. The 2020 pandemic created volatility in many of the market sectors. Speculation about the commodities market has sparked a new interest in high-demand agricultural products. While real estate has been among the most popular, a sub-section of this sector is currently under the magnifying glass. Timber REITs are a specialty class that makes up a small percentage of RIT ETFs. With the growth in this market, some wonder if they should invest in timber REITs at this time.
What is a Timer REIT?
According to the US Forest Service, a timber REIT is considered a REIT with a specialization in timber property investment. Some corporations combine timberland with other strategic investments. Qualifications mandate that the real estate investment trust must earn 95% or more of its gross income from interests in real estate, timber gains, and mineral royalty. Fifty percent of the asset value must be "real property" used in the business or trade of timber production. The timber REIT must make distributions to shareholders that amount to a minimum of 90% of the profits generated.
What are the available timber REITS?
The available timber REITS include Weyerhaeuser, Plum Creek Timber Co. Inc, Longview Fibre, Anderson-Tully Corporation, Rayonier, and the Potlatch Corporation. Seeking Alpha adds CatchMark Timber to this group. Hoya Capital Timber REIT Index Tracks Weyerhaeuser, Rayonier, Potlatch Deltic, and CatchMark. A more expansive tracking of the timber sector is available through the iShares S&P Global Timber & Forestry Index ETF and the Invesco MSCI Global Timber ETF.
An overview of the status of timber REITs
Timber real estate investment trusts own close to 20 million acres of timberlands in the United States. This figure is 10 percent of the commercially forested lands. Notably, timber REITs concern themselves with sustainable foresting complete with certifications from third-party agencies as being 100% for all four of the REITs. These REITS are involved with the real estate sector connected to the residential homebuilding market. Nearly half of the wood products manufactured for the US market go toward the construction of residential homes. Any time there is a slowing in the construction of new homes, timber REITs perform more poorly. Tumbling lumber prices serve as an indicator of performance. When the demand for lumber wanes, prices drop.
How reliable are timber REITs?
The Alternative Investment Coach offers a few facts about timber REITs that every investor needs to know. They recommend timber REIT investment as a means of portfolio diversification. They further venture that timber is a steady market that holds a positive growth outlook. Unlike investing in stocks or bonds, timber REITs provide a broader scope of activities within the timber sector of the real estate market. The profits or losses have more to do with the income earned from the actual timberlands.
Benefits of Timber REITs
The timber REITs either own, manage or control the timberlands within their respective portfolios. The land is a hard asset that retains value. The prices trend in line with mortgage notes, influenced by central bank interest affecting inflation. The property maintains its intrinsic value. Lands that contain older trees generate profits through harvesting or the manufacture of products, sometimes both. Timber REITs are more stable because they are naturally prone to hedging against inflation. Timber, unlike many other markets, does not require moving commodities quickly because trees can be standing, then harvested at the best times when market demand is high. There are no associated costs for warehousing or other kinds of storage and no waste from spoiled products.
Why invest in timber REITs?
Timber REITs are easy investments. This type of investment does not require direct investment in timberlands. You're a timber investor when you place your money in timber-centric REITs that do all of the planning, investing, and work. Timber REITs have the liquidity of an ETF, which makes selling your investments uncomplicated. There is nothing to do other than place an investment then track the progress of your investment through one of the two timber EFT tools for measuring performance. Since the four timber REITs ensure sustainable practices, it is a market that continues to produce, even when there is a need to adopt a holding pattern due to market trends. Timber is a commodity that doesn't spoil and older trees continue to grow larger.
What should you consider before investing in timber REITs?
According to the Motley Fool, Timber REITs are best for long-term investments. All investments come with risks. Wisdom suggests that investors gain a working knowledge of the US housing market. Awareness of the recent trends is vital for decision making. The outlook for this portion of the market is a factor in deciding where to invest. A surge in new construction of residential houses is a good indicator that the market is strong. This factor could signal that adding a timber REIT to your portfolio would be a wise decision. There is currently a rising need for lumber due to the aging status of housing in need of refurbishment or replacement. It's a simple formula that supports the assumption that there will be a need for more lumber soon.
Should you invest in timber REITs? The answer is neither yes, nor no. Making investments is always risky whether the outlook is bright or dismal. Awareness of the trends and projections for the timber market, particularly in the real estate sector of this specialization, can help you to decide if adding a timber REIT to your current portfolio would be beneficial. The experts are optimistic about the outlook for timber REITs because this sub-sector is among the steadiest and most reliable ways to invest in timber. It's a simple process that doesn't involve hands-on management. You have the option of pulling your investment every month if you feel uncomfortable about the outlook.
Written by Allen Lee
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