Finnish Forestry’s Green Returns

    Stockholm (HedgeNordic) – In the Nordics, forest ownership has been close to the people for centuries. As a matter of fact, a large majority of forests across the Nordics are owned by private individuals or families. In Finland, this percentage stands at 60% today on average when taking into account the entire country. This proportion is even higher when looking at the more fertile forests of the south, as the state is a large owner of the less fertile shrubbery lands in the north of the country. According to Kari Kangas, manager of UB TImberland Fund (AIF), an open-ended Finnish timberland fund offered by Helsinki-based United Bankers Asset Management, this configuration represents an opportunity for professional investors.

    Born in a small village in Finland, Kangas was in close contact with the forest from an early age, as his father was a forester. He later went on to earn a doctorate in forestry economics. Kangas has since then held several expert and executive positions, working with forests across the world, including with the United Nations in New York and Swedish pulp and paper company Stora Enso in Russia. Right now, his main goal is to facilitate access to forest ownership for a larger number of people. “I want to provide an opportunity to be a forest owner trough my fund,” he says. “It is very nice when you get positive feedback from your customers that they like this type of asset.” By owning property through a fund, end investors gain exposure without having to manage the underlying investments, and especially benefit from the purchasing expertise of specialists.

    Kari Kangas, Portfolio Manager, UB Timberland Fund (AIF)

    “We buy about 100 properties per year,” says Kangas, “out of a total of 1600 transactions per year in Finland. We therefore have very comprehensive price information.” Being a large actor in the market allows the managers to cultivate a wide acquisition network in the forest property market. This means being at the right place at the right time, but also being able to evaluate a property in a more precise way than less sophisticated buyers. “Without thorough analysis, it is likely to be a mediocre or less than mediocre investment: Each property has unique characteristics and analysing it on a detailed level improves the chances of delivering a better yield. Often buyers overpay for inferior forest properties because they lack the capacity to properly analyze the objects.” After acquisitions are made, professional ownership can also provide improved returns on forest property, through optimising processes and focusing on the value growth of forest stock.

    The income that Kangas and his team expect from their forest properties is around 4%. In addition to that, they believe they can count on another 2% increase per year in the price of timberland (in line with inflation). This brings the total expected return on investment to 6% on average. In the past 10 years, the annual average return has been 4% after subtracting inflation, within an interval of 3 to 6%. “Forest has offered a stable, moderate return in Finland even though a large part of the Finnish forest has been managed poorly or not at all.” Some of this return however will not compound, as the fund has to pay out at least 75% of its income in dividends to maintain its non-taxable status, being a Finnish domiciled vehicle. In any case, this makes for an attractive return at the lower end of the risk spectrum. Indeed, the volatility of timber prices in Finland has stabilised at a low level. The demand for timber is such that there is no longer a strong dependency on local construction demand. Part of the timber is used as pulp for staple consumer products, and this demand is rather stable. “The basic needs of human beings tend to remain the same,” explains Kangas. “Demand for packaging materials is solid and increasing; the same for tissue paper. More and more products are made from pulp.” To a certain extent, construction remains a driver for log prices but the diversification of product and regional mix will continue to dampen volatility. Kangas gives us some examples: “Algeria and Egypt can be important drivers, especially for the price of pine lumber, which they use to build scaffoldings. Exports to Egypt has been slow for a while due to the weakness of their currency but they are recovering now. This market has a high correlation with oil prices, but it only represents a small proportion of the market. Timber exports are highly diversified. There are new markets, like China which are importing more and
    more, especially spruce. As a result, the volatility is low
    compared to other raw materials.”

    Most of all, timber compares very favourably against other raw materials when it comes to carbon footprint, which is negative. This means that adding forestry to a portfolio is a good way of neutralizing its overall carbon footprint. “The trees capture the CO2 in the atmosphere,” Kangas reminds us, “and they store it in their trunks, branches, roots and leaves. Plant litter stores carbon in the soil. The carbon can be released depending on the use of the timber or when the plant litter decomposes, but often it is stored very durably, for example in wood constructions.” Furthermore, forests in the Nordics currently grow more than they are
    being harvested.

    “So, more and more carbon is sequestered in the forest,” adds Kangas. Compared to what happens to forests in other latitudes, forests in the Nordics are managed in a
    very sustainable way. Mandatory replanting as well as guidelines for forest maintenance and felling are important parts of the carbon equation. Last but not least, global warming is having a positive impact on forest growth, accelerating the capture of carbon in the atmosphere. Kangas has encountered a very strong interest from institutional investors looking for the “carbon sink” effect of investing in forestry. “In Sweden,” he comments, “it is even more important than in Finland.”

    This article is part of HedgeNordic’s special report on Real Estate & Infrastructure. Read the end of this article and more here.

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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