Better value in less developed markets, Nuveen says

Low turnover and steady institutional investor demand dictate that real asset markets will remain tight over the next year, according to Nuveen.

Head of natural resources Justin Ourso told Agri Investor this week that “investor and strategic interest is one factor keeping returns compressed in the US in the near future,” adding that the low-interest-rate environment and tight supply available for sale were other factors. He expected these conditions to persist in 2018.

His comments coincided with the release of Nuveen’s 2018 Outlook, in which Ourso argued that a global, diversified strategy can help withstand competitive pressures.

“Farmland and timberland investors may find better relative value in less-developed non-US markets, despite higher risks,” Ourso noted in the report. “We expect US returns to be modest near-term as farmland prices recover from lower income levels and timberland appears fully valued in many markets.”

Permanent tops

The strong recent performance of vineyard properties has been a driving factor in elevating returns of permanent-crop farmland over its row-crop counterpart, according to the report. Ourso said that vineyards have experienced double-digit total returns – consisting of mid-single-digit income return and strong capital appreciation – with both vineyards and tree-nut properties benefitting from favorable demand trends.

He also highlighted that investments outside the US could benefit from lower production costs, direct access to rising emerging-market demand and land development.

“Latin America has emerged as a standout location for timber investments”
Justin Ourso, Nuveen

“For example, it might include greenfield projects for permanent crops in international markets as well as greenfield timber projects in Latin America,” Ourso explained further to Agri Investor. “We are not pursuing broad-based land conversion opportunities in environmentally sensitive areas.”

For timber, Ourso observed that fine hardwood plantations with a focus on sustainable operations offer the potential for “premium returns” over a 10- to 20-year hold period. Expected return premiums of between 200 and 500 basis points derived from higher perceived country risk, foreign exchange exposure and restrictions on foreign ownership make Latin America and Asia preferred markets for investment, he argued.

“Latin America, in particular, has emerged as a standout location for timber investments owing to its positioning in several key important wood markets. Brazil and Uruguay have established themselves as global low-cost providers of hardwood pulp for packaging and tissue.”

Fishing for higher returns

Ourso told Agri Investor that many, but not all, risk factors across farmland and timber are similar and that Nuveen’s pursuit of diversity across regions, climates and crop types is part of its approach to managing those risks.

“In practise, that means focusing on strong individual asset selection based on agronomic knowledge, the availability of good local infrastructure and sustainable water resources, as well as deep diligence into land title chain and critical ESG factors,” Ourso said.

Ourso also addressed conditions in agribusiness, writing that Nuveen sees opportunity to produce mid-teens returns with five- to 10-year hold periods through investments tapping into growing protein consumption, demand for clean-label food and emerging-market growth more broadly.

“We see potential opportunities in value-add tree-nut and fish processing, and growing feed for salmon and fish farming,” Ourso said.