Guest Editorial by David Fessler, Advisory Panelist, Investment U
Editor’s Note: Jim Stanton is attending to some family matters today, so Investment U columnist David Fessler is pinch-hitting for him. And in keeping with Jim’s usual “Sector Watch” theme on Mondays, David focuses on the timber area, explaining why the industry has witnessed a decline over the past 10 years. No matter whether you’re already invested in timber - or thinking about investing in it - you’ll need to know which three REITs to avoid and which one is handling the falling trend better than the rest. David has the answers below…
Martin Denholm, Managing Editor, Smart Profits Report
The Rise And Fall Of The Timber Industry
Ten years ago, it would be hard to imagine a more stable investment than timber, or those Real Estate Investment Trusts (REITs) that bought millions of acres of harvestable trees.
Here are just a few reasons why the 1990s were an ideal period to have timber as an investment:
- The housing market was solid, with growth beginning to surge in major cities.
- Much of the world was still pre-digital, and businesses still relied heavily on shuffling paper (which of course comes from trees).
- Electronic news was still a novelty; magazines and newspapers were still going strong.
What a difference a decade makes:
- Housing is in the dumps, with no clear sign of a resurgence on the horizon.
- Business has gone digital, shunning paper wherever possible.
- The world is increasingly getting its news electronically, as evidenced by the number of newspapers that have gone out of business.
The shift away from paper has resulted in an almost complete lack of demand for wood or wood pulp. As a result, prices for paper and lumber have hit multi-year lows. Lacking any catalyst for change, it’s the perfect setup for an extremely overvalued scenario in the timber industry.
Timber REITs Heading Down The Commercial Real Estate Road
In the mid 1990s, timberland prices hovered around the $1,500 to $2,000 per acre range. But today, a more realistic valuation is less than half that. And therein lies the problem: Many of the timber REITs haven’t devalued their land.
If that sounds a little like the overvalued commercial real estate mess we’re in right now, it’s no accident. The biggest problem? REITs are managed by human beings.
