Asia-Pacific: Demographic changes lead to positive disruptions
The risks (and hence the opportunities) are changing
Some things don’t change: Farmland investing will always be dictated by factors such as weather patterns, water resources and availability, infrastructure and soil types. But there are other risks that are harder to identify, like technological advancement, political risks, local regulations and trade flows. We believe farmland investors with the ability and infrastructure to adapt to these changes will be competitively positioned for long-term growth.
Farmland investing is about more than just weather and soil
Understanding which risk and return factors affect specific regions is critical in farmland investing.
Farmland opportunities sometimes exist in little understood remote areas or are affected by factors that can be incredibly complex, which is why we believe partnering with local farmers, regulators and tenants is critical, and that farmland investors with the ability and infrastructure to uncover and adapt to these changes will be competitively positioned for long-term growth.
Consider, for example, the issue of land title rights in Australia. Admittedly, title right risks probably aren’t normally on top of investors’ minds as they consider investments because they aren’t as apparent as tangible farmland features such as soil type. But we have found that knowledge of such local regulations provides the opportunity to uncover hidden value.
In Australia, land mining rights are owned by the government (known as Crown rights), which creates possible political risks when investing in any land investment such as farmland. Debates over land use can delay investments and cause legal trouble that could take years to settle.
Similarly appearing regions may actually be quite different
This is an issue in several countries and regions around the world, but in actuality, Australia has a very low title land risk. The majority of Australian farmland is family-owned, which makes ownership and land right usage relatively transparent and hence, easier to invest in. This isn’t always the case. To take another example from a different region, Canada is actually quite similar to Australia in terms of overall population size and crop types produced. And, like Australia, the majority of mining land rights in Canada are owned by the Crown. But there is a key difference: Farmland regulations and title rights are much more complicated in Canada than they are in Australia, heightening title risks.
Comparing Australian and Canadian land title risks may seem like an esoteric exercise, but we think it is exactly the sort of analysis that provides an edge in farmland investing. While understanding fundamental factors such as crop types, rainfall and soil dynamics certainly comes into play, navigating lesser understood risks is equally important for long-term success.
Asia-pacific real estate
Compelling real estate opportunities can be found in Tokyo, but selectivity is key
Japan has long been negatively affected by structural and demographic challenges. Globally, the economic cycle is in its later stages while global monetary policy is becoming less accommodative. All of this probably doesn’t bode well for Asia as a whole. But that doesn’t mean there aren’t compelling real estate opportunities in that region. Consider Tokyo: That city has a stable population and an expanding middle class. And at the same time the city is enjoying robust liquidity, low interest rates, solid credit ratings and should benefit from rising rents across most real estate sectors. Of course, to capitalize on these trends, investors need to know where to look.
Market volatility could create opportunities for Tokyo real estate
At this stage of the cycle, we think a focus on finding relative value is increasingly important. Specifically, we think a focus on individual security selection makes sense — both in terms of picking the right places to invest and avoiding cities poorly positioned for late-cycle dynamics. In the coming years, we are expecting to see higher levels of global financial market volatility, which will no doubt affect real estate prices. But, as we have seen in the past, this sort of volatility can also create opportunities.
Consider the experience of the Tokyo Pacific Tower during the global financial crisis. The value of that property plummeted during the crisis, even though its intrinsic value didn’t really change. Investors were panicking and dumping assets and overreacted by selling perfectly sound investments as a way to try to avoid risk. Not surprisingly, the value of Tokyo Pacific Tower recovered quickly. Investors would have been better off if they avoided the temptation to sell at fire-sale prices — or even to consider buying when prices were depressed. We wouldn’t be surprised to see similar sorts of price dislocations in the coming years in Tokyo real estate.2
Demographic trends in Japan coupled with future growth expectations bode well for the city
One of the reasons Tokyo real estate recovered from the global financial crisis so quickly was that the city had been enjoying a relatively strong increase in property values. This may be surprising considering that Japan as a whole is suffering from a decline in population, but Tokyo’s population has actually been stable. And Tokyo is benefiting from an influx of Millennials who have higher disposable incomes and tend to contribute to a city’s cultural and economic growth. We have found that there are multiple cities around the world that have been benefiting from similar dynamics (see Figure 6). And a focus on real estate in individual cities, rather than countries as a whole, can make good investment sense.
In our view, Tokyo is quite well positioned to remain an attractive real estate market. By 2030, it is estimated that half of the world’s output, more than a third of consumption and nearly half of the top twenty-five global cities will be in the Asia Pacific region.3 These structural tailwinds provide a compelling backdrop for Tokyo real estate. While population growth by itself cannot drive long-term returns for a city, promising future economic growth coupled with strong structural trends may.
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Sharpe Ratio (Risk-Adjusted Return) is a risk-adjusted return measure calculated using standard deviation and excess return to determine reward
per unit of risk. The higher the Sharpe Ratio, the better the historical risk-adjusted performance. The “Shiller” P/E Ratio is a valuation measure that
uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business
cycle. Bloomberg Barclays U.S. Aggregate Index represents securities that are SEC registered, taxable and dollar denominated. The index covers
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and asset-backed securities. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a
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listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market List. The NCREIF Farmland Property Index is
a quarterly time series composite return measure of investment performance of a large pool of individual farmland properties acquired in the private
market for investment purposes only. The NCREIF Property Index (NPI) is a quarterly, un-leveraged composite total return for private commercial
real estate properties held for investment purposes only. The NCREIF Timberland Index is a quarterly time series composite return measure of
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of forests and timberlands.
A word on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk,
derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Foreign investments involve additional risks,
including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Alternative investments
may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing
or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory
requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative
investments are not suitable for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of
the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future
results, and there can be no assurance that comparable returns will be achieved by any strategy. As an asset class, real assets are less developed,
more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership
of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and
ability to obtain insurance, and risks related to leasing of properties. Real estate investments are subject to various risks, including fluctuations in
property values, higher expenses or lower income than expected, currency movement risks and potential environmental problems and liabilities.
Farmland investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to
risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency
values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
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