CHINA - A London-listed timber vehicle funded mostly by UK and European pension schemes is acquiring Chinese assets in a bid to build up a significant market-specific portfolio.
Liane Luke, chief timber officer at US specialist fund manager FourWinds, which manages the Phaunos timber fund, told IPE Real Estate it had a "robust pipeline" of Chinese timber deals after acquiring its first Chinese asset, in Jiangxi, earlier this year.
Luke acknowledged that investing in China can be "hard going", not least because of a lack of tradition of timber investment, and that it had initially been difficult to find institutional-quality portfolios. But she said the country also has a significant domestic market for the commodity.
Chinese figures showed a 40% increase in annual lumber imports, and a 44% increase in pulp imports, in 2009.
Phaunos also holds assets in New Zealand, Indonesia and East Africa, along with smaller holdings in the US. "The countries we invest in have vibrant export markets or they're next to them," she said, citing countries like New Zealand, which sells into Indonesia, China and South Korea.
"You have operational risk, location risk and regulatory risk in every investment. In China and Brazil, yes, there's market and political risk - and there's a premium for it."
However the fund has ruled out investing in Russian timber. "The political risk is too high," Luke said.
The fund met investor demand for a listed vehicle with a broad mandate, according to Luke, with Phaunos being one of only two listed timber funds in existence. In some cases, such as the New Zealand Matariki project, the fund has co-invested with other institutional investors, diversifying risk by acquiring six plantations on two Kiwi islands.
US timber funds tend towards a domestic bias. In contrast, UK and European pension funds are interested in a globally diversified fund. In addition to geographic diversification, the fund is diversified across the specific characteristics of timber, such as species and age class, which allows for sustainable harvesting - a key investor demand.
"Investors feel increasingly insecure in capital markets, and timber has low volatility and low correlation with other asset classes," said Luke. "We've also shown that you can manage through a recession. When money shrank, trees grew. So even though you had a low unit price, there was a larger multiple. It's an asset whose time has come."
The fund's target return is 12%. Its return this year was 8%.