GLOBAL - Long-term cashflow, a need for diversification and growth prospects in a fragmented industry are pushing investors towards timber REITs, according to a report published by credit ratings agency Moody’s.

The report claims this "relatively new, yet often misunderstood" asset class offers returns uncorrelated to equities, fixed income or real estate.

Focusing on US timber REITs, the report also points to appreciating value – in contrast to real estate, whose value depreciates over time.

"If you look at timber’s investment characteristics, you see a large, liquid, hard asset class and a good way to protect capital against inflation," said Christopher Wimmer, one of the report’s authors.

Forecasting an increase in the number of timber REITs, the report points out firms in the sector are under pressure to separate land from manufacturing. Integrated forest products companies make up less than 1% of the timber market.

Timberland ownership in the US remains fragmented and despite some consolidation, "it’s a small dent in the market", according to Wimmer.

There are downsides to the asset class, however, as one of the sector’s main attractions – low interest rates – is subject to change.

"Timber investment management organisations and private entities have taken advantage of capital going into alternatives and low interest rates," said Wimmer.

"Capital looking for alternatives will stay out there but an interest rate rise might make a difference. The real issue is volatility, with exposure to forest product cycles. On the other hands, returns are stable," he added.