While forestry operates on a limitless timeline, spanning generations, the worlds of finance and investment are much more immediate. We are fascinated by this apparent disparity. We wanted to understand how investment decisions are made, what the drivers are and how risk is calculated in a value-chain that encompasses landscape scale forests, manufacturing and the construction sector..

INVESTMENT

Money and trees

With an open mind we ventured into a world many of us are unfamiliar with but is pivotal to the value-chain. For all the talk of the radical, of responsibility, of forestry and species, nothing happens unless it can be paid for. We began by talking with Pertti Vanhanen of the Cromwell Investment Group. Passionate advocate of timber construction, deeply rooted in the forest from a childhood spent in rural Finland, but also running a multi billion euro investment scheme for timber construction.

FUTURE OF TIMBER

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For Pertti Vanhanen at the Cromwell Group there is an opportunity of being perhaps a little early to the timber construction investment market...

“Some investors … are really keen to hear more but you know, we are the first mover where we are pushing forward. So we have educated very many people about mass timber and the benefits of the massive timber and timber buildings itself. So there is some demand but it's still in the early stages.”

Future of Timber - Investment with Pertti Vanhanen, Cromwell

00:00 / 26:06

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Forests take an average minimum of fifty years to grow. The ongoing impacts of climate change are making forests significantly more vulnerable to biotic and abiotic pressures. The potential for damage from fire, wind, pests, or disease is increasing. At the mercy of such stressors, why then would anyone invest in forestry and why has it been such a lucrative asset class over the past three decades?

To explore this question we spoke with David Edwards from Tilhill Forestry whose portfolio extends to 200,000 hectares of forest managed on behalf of investors and private clients. Though David acknowledges they deal mainly in the UK in upland spruce plantations he was keen to point out that institutional and private investors in forests are primarily interested in their return on investment (ROI). In the UK this translates as spruce plantations that grow fast with relatively simple silviculture.

Future of Timber - Investment with David Edwards, Tilhill

00:00 / 24:35

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Amid growing conversation about alternative silviculture methods, investors continue to favour and accept the risks associated with largely monocultural spruce plantations. Prioritising the higher returns over the risks and perceived lower profitability associated with more diverse, mixed-species and mixed-age forestry. This picture feels further compounded by the freehold value of upland spruce being much lower than the freehold value of lowlands where the majority of mixed species silviculture exists.

It's a story we've heard before. It raises the question of when we can expect change. David would love to offer mixed-species forestry investments, but the returns would need to match those of spruce to make it viable. For now, innovative and potentially more resilient silviculture is mostly in the hands of private landowners, who are more inclined to think in terms of generations rather than short-term investment or pension cycles.

Blumer Lehmann headquarters, Gossau (Switzerland)

In the realm of processors, how is changing forestry and changing construction dynamics reconciled? With forest investment dictating supply and construction investment dictating demand, the processors, sawmills, and manufacturers seem stuck in the middle. Caught somewhere between competing priorities that need to match both future supply and future demand. For a manufacturer starting to look at a major investment in five to ten years (that will be expected to last twenty), how do they mitigate the risk of substantial changes in supply of bio-based materials and demand based on fluctuating global economies?

At glulam manufacturer Blumer Lehmann, CEO Katharina Lehmann sat down with us to talk about the company’s investment priorities. Their ten to fifteen year investment cycles have to fit with an expected continuation of the current standard forestry output for fifty to sixty years. After that they expect to see a change in forestry output and will need to be ready to invest to deal with a different suite of materials

“We think in terms of a 10 to 15-year cycle, so in terms of time and of course if you look at the forest, we assume that we will be able to fall back on what we have today for another 50 or 60 years or so, and of course we also imagine what will the world look like afterwards? In terms of the Swiss context, it will be the case that the diameters will become stronger and stronger, because these are the assortments that we should take out of the forests in order to optimise fitness in the forest.”

Katharina Lehmann, CEO Blumer Lehmann

Within their current investment cycles there is a trend to invest in raw material efficiency.

“We strongly believe in an increasing demand for timber constructions. And as a company, we are challenged to respond to this demand. This means, on the one hand, creating capacities to handle large timber construction projects and, on the other hand, producing products where we can optimise the material use of forest resources.”

Katharina Lehmann, CEO Blumer Lehmann

Blumer Lehmann's new glulam office building

Optimisation may mean using volumes in more considered ways, it may mean moving further up the value chain to full component manufacture as Pollmeier is doing. Or it may mean using underutilised resources as in Vastern’s approach. In all cases, investment is focussed on balancing increasing efficiency in raw material and production of products fit for modern construction. A fine balancing act.

Technology and automation are seen as drivers for investment at Blumer Lehmann, something we see mirrored throughout the timber processing sector. Much digital manufacturing is being led by bigger industries such as car assembly and we are fortunate to be able to draw down appropriate technologies from these. But even technology transfer requires substantial R&D funds.

At BSW the investment imperative over recent years has been very different. Harry Stevens (Managing Director) explains that vertical integration has been key to the company's investment strategy and future proofing. From a series of five sawmills the group are now invested in substantial forest nurseries, in forest management, the continuation of milling, but they are now also adding value through glulam production at Binder Holz. This investment in the whole value-chain is a matter of both ensuring continued supply and capturing more of the margin at each stage of the supply chain.

Harry laid out for us starkly why volume is still king when over quality when it comes to investment.

“You can have the best quality in the world, but if you've only got a very finite amount, you cannot invest the money. So there's quite a lot of quality of different bits and pieces out there but if you haven't got scale, there's no point in starting to look at it. “

Harry Stevens, BSW

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The examples provided by BSW and Cromwell reiterate the importance of education and improved collaboration across the value chain. How we translate complexity, risk and opportunity into investable products will dictate the success of the whole sector. This is also true in construction insurance (but also forestry insurance) where risk aversion often mitigates against technologies or supply chains that are poorly understood or have little data attached to them for analysis.

Frank Vasek of the Timber Finance Initiative in Zurich identifies a fundamental issue with the timber value chain. He notes that it being so far removed from typical investment areas means that it is scarcely understood, a perspective shared by Pertti at the Cromwell Group.

“The financial market simply has no access to this industry, does not understand it …everything is only forest orientated. And then it's quite normal 'Forest Investment 1.0', you could say, where you invest in forests like real estate at the end of the day and where hardly any changes occur”

Frank Vasek, Timber Finance

Image_ Future of Timber_ Investment with Harry Stevens, BSW.png

How does all this translate to construction investment?

Harry at BSW sees an opportunity for the company in the UK housing market. With the new UK government pledging 300,000 new homes a year. Across the border in Scotland. 90% of new homes are timber framed and it isn’t a huge leap to see England up it’s timber framed domestic construction from its current 10%.

Future of Timber - Investment with Harry Stevens, BSW-

00:00 / 23:41

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For Frank leveraging the power of the markets is vital for the future of the whole-value-chain:

"And we have different leverage points that we want to use, firstly from the financial market side to publicise this (timber supply chain) and secondly… to find new solutions that actually increase demand in timber construction itself, so with investors in turn, institutional investors, that they actually have an opportunity to use this CO2, which in the end, let's say, is quantified and then evaluated, that you can tie it to the property in order to really level a competitive advantage, or let's say the competitive disadvantage, if you like, compared to steel and concrete."

Frank Vasek, Timber Finance

What is the future of timber ?

A project by Evolving Forests
Funded by Built By Nature
Supported by Forestry Commission, Scottish Forestry Trust, Egger

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If you're inspired, challenged by, or curious about any of the themes or discussions the project touches on, we urge you to get in touch. This remains an ongoing conversation, not a static piece of work

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The concept of market engagement may address some of Harry Stevens' concerns, particularly his view that investors are reluctant to accept the lower perceived returns from newer forms of forestry, despite their potential resilience to climate factors. However, discussions with Frank highlight the timber sector's small, fragmented, and often family-run nature, which poses challenges in attracting significant investment. Which, in turn, reinforces Harry's observation that the future direction of the sector is likely to involve consolidation, with fewer but larger businesses capable of achieving the efficiency and scale necessary for reinvestment.