subject: Ways To Offset Inflation With Land Investments [print this page] My Uncle keeps asking me what type of real estate I think he should invest in. Income producing commercial property? Timberland or production farmland? I think the answer is all of the above. He questions, "What about cash if inflation hits?" and asks about hedging inflation with timberland. I had to do some serous research to learn more myself, and I want to share what I found as well as the resources I used to determine an answer to the question regarding hedging off inflation.
Inflation is at a 44 year low according to a recent headline from the Wall Street Journal. That news will make you stop and really think because one of the most common arguments for investing in timberland is its purported potential to hedge inflation; therefore, with inflation as low as it is, does that reduce the attractiveness of timberland investments?
Previous research indicates that timberland investments may hedge against unexpected inflation. The seminal academic paper in this area, "Do Forest Assets Hedge Inflation?" by Court Washburn and Clark Binkley (Forest Science, August 1993), asserted that timberland assets, especially those in the Pacific Northwest and South, hedge "higher-than-anticipated inflation." In 2007, forest economist Jack Lutz affirmed a positive correlation between timberland returns and inflation, concluding that timberlands will "preserve capital in the face of rising consumer prices" (Forest Research Notes, 3rd Quarter 2007). Forisk revisited this issue last year with similar results for direct timberlands (first figure "NCREIF Timberlands and Inflation"), but different results for an alternative timberland investment vehicle: publicly-traded timberland-owning REITs (second figure "FTR Index and Inflation").
Returns from direct timberland investments, as measured by the NCREIF Timberland Index, correlate positively on an annual basis with inflation; public timber REITs, as measured by the FTR ("footer") Index, lack a similar relationship over the past ten years. The key factors being: the differences in owning hard land assets versus super-liquid public equities
What does this mean with current rates of inflation? The fact that inflation rates are low today has no relevance to timberland's potential to mitigate exposure to inflation in the future. The key game is against "unexpected" inflation, not consensus expectations.
In 2010 with the current economic environment now is the perfect time to buy timberland or many other types like recreational, commercial, waterfrontage and high yield production farmland. I will use Alabama, Louisiana and Mississippi as examples for cost of land and current conditions in the market. In Mississippi Delta farmland with good soil and high production is in great demand and foreign buyers are snapping it up as fast as it hits the market. Alabama recreational is slower moving but if you find a good price again it becomes a bargain if the price will offset inflationary cost. If you are looking for commercial land, Louisiana has some solid cities like New Orleans and Baton Rouge in the Southern end of the State and Shreveport in the North end of the State. In your city areas for commercial land if you can find an attractive price and believe me it's out there if inflation does surge and it very likely will at some point it can help to recoup inflationary losses in other parts of your investment portfolio.
Visit my blog to see charts and more resources on this subject.
(Warnell Forestry)
NCREIF (National Council of Real Estate Investment Fiduciaries)
