By Gordon Hamilton, Vancouver Sun
One of the country’s leading investment firms is telling its timberlands investors to hang on for almost two more years of depressed prices while the U.S. housing market struggles to come back into balance.
Further, the Canadian forest industry is least able to weather a housing market that sputters during 2010 and 2011, Brookfield Timberlands Management says in its third quarter research report.
The report says there will be “significant down-sizing of the Canadian industry.” Investments in timberlands, rather than mills, remain fundamentally strong and offer opportunities, but the report concludes that the current market “is not for the faint of heart.”
Brookfield bases its two-more-years-of-pain forecast on what it calls a “glut” of homes either in foreclosure or facing foreclosure in the U.S., a growing crisis that threatens to undermine any housing recovery this year.
The Brookfield analysis, by Reid Carter, managing partner of Brookfield Timberlands Management LP., is one of the first research reports on the forest industry of 2010. Prepared for Brookfield’s own investors, it flies against views held by most analysts as recently as last December.
Carter said in an interview that he stands by his conclusions.
“The real problem is that people look at the inventory of new homes for sale,” Carter said. “That’s a very small proportion of total homes for sale out there.”
The new home inventory was down to 235,000 units at the end of November, the lowest level since 1971, prompting optimism that the worst of the housing bust was over.
But when homes in foreclosure or facing foreclosure, plus homes that owners are keeping off the market until prices improve, are added to the mix, the surplus housing inventory jumps by more than five million homes. That glut will take nearly two years to unwind, Carter said.
The huge overhang of housing inventory is expected to keep new home construction dampened until 2011. Even then, Carter does not expect a solid turnaround until 2012.
A prolonged housing downturn will hit B.C. sawmills particularly hard.
Carter cited the high Canadian dollar, a 15 per cent export tax on U.S. lumber shipments and increased operating costs because of the mountain pine beetle epidemic as prime factors that will put B.C. mills at a disadvantage. Further, because of their distance from the U.S. market, B.C. Interior mills will also have higher transportation costs than their U.S. competitors.
Before Christmas, the consensus among investment analysts was that the U.S. housing market would show signs of recovery later this year, but that is starting to change.
“I am coming rapidly to the same conclusion [as Carter]. We are putting out a note along the same lines,” RBC Capital Markets analyst Paul Quinn said in an interview.
“Foreclosures in the U.S. are still a huge problem and a growing problem. They are not going away. And you are still having mortgage rates ticking over. And employment is in sad shape in the U.S., which puts more pressure on foreclosures.”
Quinn said even the U.S. housing stimulus program is not expected to pull housing out of its slump. It will simply pull demand forward to the first half of the year, he said.
“I was rosier before Christmas. Now I think home activity in 2010 is going to be slower. That’s probably going to be negative for the lumber guys.”
Carter said he expects there will be several false starts to recovery in lumber prices before a solid recovery takes hold in 2012.
Brookfield Timberlands is a division of $90 billion Brookfield Asset Management, Timberlands has a $3 billion portfolio of timber assets in Canada, the U.S. and Brazil. In B.C., it owns Island Timberlands on Vancouver Island.
He said in this kind of market, the beauty of owning timberlands is that investors can take a lower cash yield and let their inventory grow on the slump.
“If you have the right capital structure and you have patient investors, the impact of a downturn like this doesn’t have to be very significant on timberlands.”
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