Timberland as a Biological Bond

While timberland is an alternative asset class that has its own unique investment return drivers, we demonstrate that timberland is analogous to a fixed income in many ways. Like a bond, timberland can generate a stream of cash flows throughout its investment term. These cash flows are based on the biological growth and harvest of timber. Because forest growth can be projected with a reasonable degree of accuracy and is independent of outside market forces, we show that timberland behaves more like a bond than a stock. The same as fixed income instruments, timberland prices are inversely related to interest rates and risk. Mature forests and highly productive sites, which are comparable to high coupon rate bonds, have a lower duration than young forests and lowly productive sites, which are comparable to low coupon rate bonds, because a greater proportion of a mature or productive forest’s cash flows are paid in early years. Moreover, many strategies used in the management of bond portfolios can be applied directly to timberland. What differentiates timberland from bonds is that timberland is an illiquid, real asset; that timberland investors and managers can exert a direct influence on the returns; and that timberland is born with many embedded real options.

Duke Scholars

Author Bin Mei Environmental Social Systems