Post-coronavirus challenges to real estate’s reputation as a dependable store of value could draw more investors into farmland markets, said the executive leading UBS’ private markets platform.
Joe Azelby, head of real estate and private markets at UBS Asset Management, told Agri Investor: “Whenever you have a crisis, it is a reminder for people to diversify more than they have.
“People are going to scratch their heads and say: ‘Geez, maybe I have a little too much real estate. What else is out there, that, perhaps, is not going to behave in a similar way if there are more covids to deal with in the future?’”
Azelby – who joined UBS in March 2019 after approximately one year as senior partner and head of real assets at Apollo Global Management – highlighted that the hotel and retail subsectors been particularly hard hit by covid-19. Uncertainties surrounding the potential spread of future pandemics and resulting changes in demand for office space, he said, have further clouded the outlook for some real estate strategies.
As institutional investors continue to seek “pockets of calm” amid the turmoil, said Azelby, farmland’s resilience during the global financial crisis and the pandemic’s immediate aftermath is likely to be top of mind.
“People buy real estate around the world at sometimes ridiculous prices as a place to store capital. We certainly saw that in New York – where five years ago people from all over the world were buying ridiculously large condos at ridiculously large prices,” said Azelby.
“I just think people are going to look for other areas and places to store value and perhaps we’ll see the high-net-worth space engage in the farmland discussion.”
Looking for doorways
Azelby oversees more than 500 employees managing more than $100 billion in assets across 14 countries. Real estate accounts for between 80 and 90 percent of assets and revenue managed within the Real Estate and Private Markets platform, according to Azelby, who also oversees UBS’ general private equity and infrastructure investments that account for much of the remainder.
The farmland investments Azelby oversees are managed within an AgriVest Farmland Fund vehicle, which, prior to early 2016, had been referred to as the “UBS AgriVest Farmland Fund” before a regulatory change required removal of the sponsoring bank from its name.
The open-ended vehicle had raised at least $789.2 million from 64 investors since its first sale in June 2006, according to a July 2019 regulatory filing. A UBS representative told Agri Investor in an email that the vehicle’s gross asset value was $882 million as of Q1 2020.
Jim McCandless, a UBS managing director who leads REPM’s Farmland Investors unit, told Agri Investor in April 2019 the firm was then focused on increasing the portion of permanent crops in its portfolio and had been active in California, Oregon, Washington and Florida farmland markets.
Azelby said that while UBS and other investors would like to have more exposure to food and agriculture, the market faces limitations imposed by the lack of what he called “scalable doorways.” In farmland, for example, he said UBS has limited its acquisitions to properties with very specific characteristics and most deals have ranged between $5 million and $20 million each.
“Farmland has been the focus of most food and ag activity, but it’s not a space that provides a lot of scale,” he said. “The big problem for co-mingled funds is they cannot service the large players because they cannot absorb the bite sizes that the large players want, which means that the large players are more likely to pursue individual large transactions on their own. The Canadians – I know they have done that in the past and I would expect them to do more of it.”
Peering beyond the farmgate
UBS has begun a process of thinking about broader opportunities in food and agriculture, Azelby said, adding that he expects the post-covid environment will be good for those attempting to make significant changes to agricultural supply chains.
“We think there is a huge amount of technology that can be applied to farm operations,” he added. “And then, like other industries, there is a huge amount of infrastructure between the farmgate and the table at home.”
Any expansion into other ag-related markets, said Azelby, would likely draw on capabilities present within his team at REPM.
“I don’t think you are going to get scale until you approach it as a sector, and you bring in the complete food and ag value chain and you decide where you want to be on that chain,” explained Azelby.
“I view food and ag as part of real estate, which is the land component. Obviously, farm operations have a private equity element. Then you have the whole infrastructure that is required to process, store, transport and package food – there is a huge infrastructure in the food and ag space. Then there is a private equity component; there are companies that focus on the food and ag sector that are certainly interesting and viable investments.”
Prior to his stint at Apollo, Azelby played one season of professional football as a linebacker for the Buffalo Bills and spent 18 years as chief executive of JPMorgan’s Global Real Assets business. While in that role, Azelby published a white paper predicting a secular change among investors towards more real asset allocations similar to the diversification away from concentrated reliance on bonds and into equities that occurred after regulatory change in the late 1960s.
Entitled The Realization and published in 2012, the paper predicted a structural shift into real assets that would see the grouping rise from approximately 5 to 10 percent of institutional portfolios to as much as 25 percent in the decade ahead.
Azelby told Agri Investor the development of real asset markets thus far has played out largely along the lines of what he had expected. He estimates that the real asset component of an average broadly diversified portfolio has in fact risen from about 10 percent to approximately 20 percent over the past eight years.
In The Realization, Azelby categorized real asset categories by return expectations, dividing less risky “core” investments likely to yield between 8 and 11 percent total returns from “opportunistic” real assets capable of producing 14 to 20 percent returns.
“If you look going forward, all of those numbers should be lower. Most of the world has moved to a close to zero interest rate environment. Think of real assets as providers of real return and the baseline from which you measure those returns has fallen precipitously, and gone negative in some parts of the world,” explained Azelby when asked to update return expectations for 2020. “I would shift the whole curve down by 300 basis points just given what we have seen in the interest rate environment.”
The 2012 paper highlighted that the move into real assets was then at a relatively early stage, with a small group of institutional investors having distinguished themselves by creating a dedicated allocation of more than 25 percent of total assets that inspired Azelby to label them as “enlightened”. It highlighted Canadian and Australian pensions as well-represented among those institutions already aggressively integrating real assets and divided remaining pension plans among categories ranging from “experimental” to “traditional” in their approach to tangible investments.
Here, too, Azelby said the real assets market has developed largely as he had expected it would in the early years of the last decade.
“You are seeing more real assets groups having been formed over the past five or six years. BlackRock is doing the same thing,” Azelby said. “The Canadians and Australians were on to it early. The Middle East has certainly engaged in a big way in real assets. There are a number of firms that have done a brilliant job – whether its Blackstone or Brookfield – all of the big players continue to pull those things closer together.”