How Timberland Gains Value
Purchasing timberland has long been considered a safe and sound investment. Historically, timberland has provided returns that are competitive with other major asset classes with lower return volatility. For this reason, institutional investors, such as public and private pension funds have large amounts of money invested in timberland properties. While timberland has proved itself to be one of the more stable investments around, small investors should be well informed and understand the critical components of timberland value before purchasing.
Components of Value
Timber. The value of rural land is influenced heavily by its timber. In some cases, the trees are worth more than the raw land. Total volume, size, growth potential, species, product grade, and local markets determine the value of standing timber (aka stumpage value). The value per acre can range from a few hundred to several thousand dollars. Timber gains value in two primary ways, biological growth, and product class graduation.
Biological Growth. Much of the return from a timberland investment comes from its biological growth (tree volume growth). The rate at which a stand gains volume depends on species, stand age and stocking, soil productivity, management, and genetics. As an investment, trees have a quality that almost no other has—stand volume growth is almost never negative.
Product Class Graduation. As a tree matures, it grows into higher product classes. In most markets in the Carolinas, each product class jump represents a substantial gain in price per unit. For pine timber, the three main product classes are pulpwood (+/- $9.00/ton), chip-n-saw (+/- $17.00/ton), and sawtimber (+/- $24.00/ton).*
Land. As with any real estate investment, the price is influenced heavily by location, but in rural areas, land prices have the smallest influence on timberland returns. However, in many situations (such as the Charlotte Region), regional growth, population, and recreational interests increase the value of the land to such an extent that substantial gains can be experienced by selling short of the usual hold for a timberland investment.
Other Factors that affect value
Accessibility. Does the tract have a road system? Is it usable in all seasons? Is there legal access to a public road?
Timber condition and health. Has the timber been managed well in the past? Is there potential for a healthy growth rate in the future? How long until the next harvest?
Boundaries. Are the boundaries clearly marked? Is the advertised/deeded acreage correct? Will I need a survey?
Neighbors. What or who is next door? Will neighbors use impact my future property value?
Facilities. Are there structures and access to water and electricity? Are these things a necessity for my ownership purposes.
Lease income. Is there an opportunity for annual hunting or farm lease income?
Terrain. Does the lay of the land inhibit harvesting or other management practices?
Liabilities. Are there problematic old wells, abandoned structures, etc?
Aesthetics. Is the property visually appealing?
Each property has its own unique positives and negatives, so it is a good idea to seek qualified professional help when buying or selling timberland.