Farmland is about 20 years behind timberland and perhaps up to 40 years behind commercial real estate in terms of its evolution as an asset class, Nuveen head of real assets Justin Ourso said.

“It lacks the vast amount of data available to investors when analysing commercial property, so that can be a challenge,” Ourso told an audience at the Investment Magazine Infrastructure & Real Estate Conference held last week in Melbourne.

These comments were made in response to queries from local superannuation funds keen to ask about this fledgling asset class and the limited ability to build scale within it.

“Ultimately, it is a case of the market continuing to evolve,” Ourso said. For instance, he noted that the institutional transactions in the US agriculture sector made up just 1 per cent of portfolios.

The real assets specialist did point out a slight flurry of investor interest in the farmland value chain – from technological developments in seeds to the production stage; however, he warned there were big risk-reward differences along that continuum.

“Leasing farmland assets is very different to owning a processing plant,” Ourso said. “It’s a different trade-off and you need to underwrite it differently.”

Generally speaking, portfolio construction is not that different to how it works in other asset classes, Ourso went on to say, but the return drivers are different and risk-mitigation strategies are critical – especially for climate and weather risk but also regulatory and political risk.

As he sees it, a large part of Nuveen’s portfolio contains assets that are similar to commercial real estate.

“As a landowner, we identify a best-in-class operator as our tenant, thus removing ourselves from the crop risk.”

Ourso also likened some investments to fixed income-type instruments, since Nuveen is going to collect rents despite volatility of climate or commodity prices.

“It depends on where on the risk-return spectrum you want to be,” he said.

Diversification into agriculture assets has paid off for Nuveen. Looking at the historical return patterns, he can see a low negative correlation with other areas of his portfolio.

“That non-correlation thesis proved up for us,” he told conference delegates. “We have seen return patterns behave differently with farmland and that has been very beneficial to us.”

When Nuveen first introduced farmland as an alternative investment back in 2007, it came under fire from rivals for buying farmland at an 8-10 per cent return when one could invest in a Triple A-rated asset-backed security for the same return.

The global financial crisis hit and farmland vastly outperformed every area of Nuveen’s portfolio, Ourso said.

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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