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Europe
& North America
Identifying plantation forests in Europe proves difficult
The forest situation in Europe illustrates that there is often
no clear boundary line separating ＆plantations＊ from
＆natural forest＊. It is much more accurate to consider forest
ecosystems as a continuum with forests totally undisturbed
by man at one end and those totally dependent on man＊s
intervention at the other. In Europe, the vast majority of
forest landscapes lie somewhere between these two
extremes.
According to a 2007 sustainability report issued by the
Ministerial Conference for Protection of Forests in Europe
(MCPFE), 87.2% of forest area in Europe (excluding the
Russian Federation) is classified as ＆semi-natural＊ forest 每
a category which includes a huge range of forest types
with different levels of naturalness and biodiversity. This
is inevitable in a region where man has interacted with
forests for thousands of years. Many forests that might be
considered ＆natural＊ by the local inhabitants 每 by virtue of
the fact that they contain mainly native species and are
extensively rather than intensively managed 每 may well
have been planted.
To overcome these difficulties of interpretation, MCPFE
defines plantations tightly as ＆Forest stands established by
planting or/and seeding in the process of afforestation or
reforestation which are either of introduced species (all
planted stands) or intensively managed stands of
indigenous species＊. To be classified as a plantation,
MCFPE requires that the latter forest stands meet all the
following criteria: ＆one or two species at plantation; even
age class; and regular spacing＊. MCPFE specifically
excludes ＆stands which were established as plantations but
which have been without intensive management for a
significant period of time＊.
According to this tight definition, plantations cover only
about 16 million hectares, or 7.9% of the total forest area
in Europe excluding the Russian Federation. These
intensively managed tree crops are important for wood
production in several countries and form a very large share
of forest area in Ireland (85%), the UK (55%), and
Denmark (62%). Plantations also account for more than
10% of the forest area in Belgium, Luxembourg, Portugal,
Belarus, Turkey, France and Albania.
Plantation area in Europe (excluding Russia) increased by
2.8 million hectares in the period 1990 to 2005 at an
annual rate of 180,000 hectares. This was not at the
expense of either semi-natural or undisturbed forests, both
of which also increased during the 15 year period, by 8.0
million hectares and 1.2 million hectares respectively.
With regard to species, MCPFE collects data separately
for plantation area and for the area of forests dominated by
introduced tree species. Only a proportion of European
plantations comprise introduced species, while introduced
tree species also find their way into ※semi-natural§ forests.
However there is inevitably a close correlation between
the plantation data and the introduced species data.
MCPFE records that in total, about 8.1 million hectares, or
5.2% of the total forest area in Europe (excluding Russia)
is dominated by introduced tree species. The occurrence of
introduced species is highest in North West European
countries, where the proportion of forest area dominated
by introduced species is, on average, 15% of the total
forest area. Countries with the highest share of introduced
tree species are Ireland, Denmark, the UK, Hungary,
Belgium, Luxembourg and the Netherlands. In the Baltic
countries, Finland, Switzerland, Slovenia, Belarus and
Serbia, introduced tree species have only been planted on
an experimental scale.
Typically, the number of introduced tree species for
forestry purposes varies between five and ten species in
Central, East and North West Europe. The most important
introduced conifer species for forestry purposes are:
Norway spruce (Picea abies), Sitka spruce (Picea
sitchensis), Douglas fir, (Pseudotsuga menziesii), various
pine species (most often Pinus contorta, Pinus nigra and
Pinus strobus), western hemlock (Tsuga heterophylla) and
larch species (Larix spp). Douglas fir is an important tree
species in several countries due to its fast and high wood
production capacity and excellent wood quality. Norway
spruce is often planted in Denmark, Belgium and the
Netherlands, where it does not occur naturally. Sitka
spruce is very common and an important introduced tree
species for wood production in the UK and Ireland. In
Sweden, the Contorta pine (Pinus contorta) has been
planted on over 0.5 million hectares. It should be noted
that among the important introduced conifers in Europe,
only Douglas fir, Sitka spruce and Contorta pine are
indigenous to territories outside Europe, specifically from
the western part of North America.
The most common broadleaved introduced tree species for
forestry and wood production purposes in Europe are Red
oak (Quercus rubra), false acacia (Robinia) (Robinia
pseudoacacia) and poplar species, especially Balsam
poplar (Populus trichocarpa x maximoviczil). Eucalyptus
species have been planted for forestry in Spain on over
200,000 hectares and in Portugal in about 700,000
hectares.
Plantation assets attract European and North
American investors
A key trend in the forest sector of North America and,
increasingly, in Europe in recent years has been growing
interest in timberland as a potential private sector
investment. Large amounts of money are being channelled
into forestry assets in two ways. First, large institutions
and wealthy individuals are investing in timber investment
management organizations (TIMOs). Such assets are
generally outside the reach of individual investors as they
usually require a minimum investment of several million
dollars. This has led to the emergence of a second
mechanism for ordinary investors seeking timber
exposure: specialized exchange-traded funds (ETFs) or
real estate investment trusts (REITs). REITs include Plum
Creek Timber, Rayonier, and Potlatch, all operating out of
the US. Examples of ETFs are the Claymore/Clear Global
Timber Index ETF and the iShares S&P Global Timber &
Forestry Index Fund ETF in the US, and the Phaunos
Timber Fund and Cambium in Europe.
The financial assets of these investment companies and
funds are now considerable and represent a major new
force in the global forestry industry. For example, the
Phaunos Fund alone had a Net Asset Value of USD495
million at the end of 2008, up from only USD115 million
at the end of 2006.
The US is still generally regarded within the financial
industry as the best place to invest in timberland, due to
the large areas of forest land available, strong forest
growth rates, a stable political system, clear and effective
systems of regulation and strong property rights. However
the recent influx of money is now chasing after a limited
number of forests in the country as American forestproduct
conglomerates have largely completed the process
of divesting millions of acres of forests to TIMOs and
REITs. As a result investors are increasingly looking
overseas for deals.
Nations wishing to attract these funds will need to take
effective measures to mitigate political, regulatory and tax
risks. Over time there is an expectation in the financial
community that institutional ownership of timberland by
large investment funds will become more prevalent on a
global basis.
An excellent series of articles on this trend has been
prepared by George Nichols, a researcher for a major
consulting firm, where he monitors market trends
regarding institutional ownership of alternative
investments. Nichols notes biological growth drives more
than 60% of total returns from timber assets, while timber
price changes and land appreciation account for the
remainder of returns. Timber investments have generally
outperformed stocks, bonds, and commodities over the
long run. In fact their performance has been exceptional.
Quoting data from Forest Investment Associates, he shows
that the North American NCREIF Timberland Index, the
standard benchmark for this asset class in the US,
increased 18.4% in 2007, versus a 5.5% rise for the S&P
500. Longer term, the Timberland Index has outpaced
major financial asset classes such as high-cap stocks,
corporate bonds and international equities. Timber returns
have been particularly high over the past couple of
decades.
Timberland assets are particularly valued because they can
improve a portfolio's risk-adjusted returns by virtue of
fairly low correlation to other asset classes. This low
correlation reflects the fact that the primary driver of
returns - biological growth - is unaffected by economic
cycles. Relative to the S&P 500, timber has exhibited low
downside risk. Since its 1987 inception, the NCREIF
Timberland Index has declined only in one year: -5.25% in
2001. By contrast, the S&P500 has fallen four times,
including -22.10% in 2002. Other benefits of timberland
assets are that they are a good hedge against long term
inflation and are often more tax efficient than other
portfolio diversifiers, generally being taxed at capital gains
rates rather than ordinary rates. Longer term prospects for
timberland assets seem particularly good now that
international policy-makers are developing systems to
increase financial incentives for forest carbon
sequestration.
But there are risks. In his article, Nichols suggests that the
physical risks to forests 每 for example from fire and
insects 每 are often over-stated, for example usually
eroding returns by no more than 0.1% annually for US
timberland holdings that are well-diversified by
geography, age, and species. Nichols believes more
significant risks are associated with illiquidity (the
inability to readily sell forest assets) and potential overvaluation
of existing timberland assets. The potential
benefits of investment in forestry-related assets are no
longer a ＆well kept＊ secret, and as more money chases a
limited number of viable forest assets, a bubble may
develop.
Nichols is also very critical of the way some REITs and
existing ETFs are portrayed as a surrogate for investment
in forests when in fact they are more closely linked to the
performance of the forest products industry, particularly
pulp and paper. However he suggests that this is not so
much a problem with some new funds recently launched in
Europe, some of which have significant assets in tropical
countries. These new funds generally share a commitment
to socially sound and sustainable forestry, often exhibited
through pursuit of FSC certification, as they seek to appeal
particularly to socially responsible investors.
One example is Cambium which trades on the Jersey
Islands Stock Exchange. Cambium sets out specifically to
＆seek out opportunities to gain value from the certification
of its forest management systems, from the commercial
development of environmental products and services, and
from the reduction of risk by community engagement and
workforce development＊. It notes that investments may be
managed for timber production, environmental credit
production or both, but that ＆the company will not engage
in processing facilities＊. It is advised by New Forests Pty
Limited which aims to establish ＆a portfolio that comprises
geographically diverse assets located in mature and
developing markets as well as driving returns from
emerging environmental markets such as carbon,
biodiversity, and water quality＊. Cambium＊s total asset
value in April 2009 was around GBP102 million.
Investments include eucalyptus plantations in Brazil and
Australia.
Another example of this new breed of investment fund is
Phaunos Timber Fund Limited, launched in Dec. 2006,
which has made numerous investments in developing
countries, including in eucalyptus and teak plantations in
southern Brazil, eucalyptus plantations in Uruguay, and
various plantations in Tanzania, Mozambique and Uganda.
There is also Quadris Environmental Investment Fund,
which owns fast-growing teak plantations in Panama.
George Nichols articles on timberland investment funds
can be obtained at:
http://www.georgenichols.com/publishedwritings/timber/ti
mber1/index.htm.
The following is a good example of an article in the
mainstream business press 每 in this case Business Week -
about new funds allowing small investors to engage in
timber assets:
http://www.businessweek.com/magazine/content/08_07/b
4071069413635.htm?campaign_id=rss_null
The following blog is a good critique of the claims made
for some of these funds:
http://thetimberlandblog.blogspot.com/2008/02/etf-assurrogate-
for-timberland.html
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