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Farmland

Nuveen knows: alternatives

Europe: Favourable developments bode well for certain regions


European farmland

History and unique economics can make a difference

While global growth is slowing and investor optimism seems to be fading, we believe there are compelling investment opportunities in European farmland. European farmland investments can be difficult to access since the majority of farms are owned in small parcels. At the same time, there are vast differences across and between different European regions due to unique pricing structures and the fact that similar regions may be at different phases in the economic cycle. As such, we believe region-specific knowledge and local expertise are essential in identifying value. This is particularly true when it comes to often overlooked areas such as Poland and Romania. While there are many similarities between the two countries, we have found it is essential to work closely with local investors, farmers and end users to understand the unique characteristics of each region.

Romanian farmland appears poised for strong growth

These returns tend to differ across regions. For example, an investment combination of row and permanent crops in the U.S. over the past twenty-five years would have generated returns consisting of around 40% from yield and 60% from capital appreciation, according to the National Council of Real Estate Investment Fiduciaries. Romania, in contrast, has had row crop farming business returns comparable to that of other regions, but has also seen much stronger capital appreciation.

We believe region-specific knowledge and local expertise are essential in identifying value. This is particularly true when it comes to often overlooked areas such as Poland and Romania.








After the fall of the Soviet Union, a restitution process divided farmland into multiple small family-owned land plots. Since then there has been an active process of swapping from an operational perspective, allowing farmers to operate large land plots through swapping with their neighbours. However, the underlying land from these operational swaps is now being actively sold, bought and swapped from a legal title perspective moving from an operational swap to a legal swap. This brings additional appreciation because of the higher intrinsic value available as a result of owning a large contiguous piece of land. At the same time, the investor base has been relatively small but is starting to garner attention from global investors.

Comparisons of farmland investments between countries can be especially complex

While these sorts of historical trends are important, we also find it necessary to focus on fundamental analysis, comparing the differences between individual farms and regions. Investors in these asset classes need to understand individual growth patterns, rainfall amounts, accessibility of water and soil types to determine the best investment options. Similarly, the individual politics and policies of different regions can come into play.

To see how this works in practice, consider the similarities and differences between Poland and Romania. The two countries have similar rainfall patterns and soil types, but look quite different from an investment perspective. Local rent payments serve as a good example. In Poland, farmland rents have historically been paid up front, which can help mitigate risks such as the recent erratic weather that hurt the country in 2015 through 2017. In contrast, Romanian farms have historically paid rent at the end of the season, which can make issues like droughts or low yields difficult to prepare for. As such, professional farmland investors can look to shift Romanian farmland rents to up-front payment cycles to better manage unforeseen risks.

So while on the surface, farmland investments in two similar countries such as Poland and Romania could look pretty similar, they are actually quite different, and for reasons that have little to do with such traditional factors like rainfall or soil type. We have found that understanding the nuances of additional factors like historical and local trends can provide a significant investment edge.

European real estate

Berlin: a possible diamond in the rough

While the eurozone has experienced stagnant growth as part of a broader global economic slowdown, certain European cities offer compelling long-term real estate investment opportunities. By looking at broad-based structural trends such as economic growth, central bank policy decisions and local elections, we think it is possible to identify city-specific real estate sub-sectors such as housing and office space that offer attractive value. Since every city in the world is unique, we think the strategy for investing in each of them also needs to be unique. By spanning the globe and looking at a combination of local and global factors, we think it is possible to find investments that reflect a city’s individual personality. A case in point: investments in Berlin.

Berlin benefits from a range of demographic and structural advantages

Berlin is experiencing strong population growth. Berlin offers a lower cost-of- living alternative to cities such as London and Paris, and as such is attracting workers from around the globe. With three respected universities, the city continues to attract high-level students. This young and educated population creates a vibrant cultural scene filling theatres, bars, restaurants, galleries and nightclubs.

As students matriculate to the workplace, housing and workspace accommodations must be met. Our five-year office rental growth (as shown in Figure 5) forecast sees annualized growth rates of 3%, presenting one of the most compelling opportunities in Europe. These evolving demographic and socioeconomic trends have helped create a city we believe is attractively positioned for long-term growth.

We believe Berlin is well poised to navigate changing demographic trends, to meet evolving consumer demands. Germany itself remains vulnerable to a possible economic downturn due to factors such as a stretched debt market, anemic growth and the limited ability of the European Central Bank to provide stimulus. But Berlin may be able to buck the general negative trends and we think that city has the capacity to adapt to changing structural trends.

Taking advantage of low interest rates: student housing, rental properties and logistics

While Berlin overall is a city on the rise, we think there are specific real estate sectors that represent particularly attractive investment options. Berlin has been aggressively and smartly addressing the issues of rising population growth and an increased demand for housing. In particular, Berlin real estate developers have been capitalizing on low interest rates and high debt availability. As an example, city planning increasingly favours dynamic developments, which leads to a variety of futuristic living spaces. Similarly, the logistics sector is branching out into adjacent spaces such as data centers to accommodate the growing technological presence in the city. While structural demographics certainly support the Berlin economic outlook, certain real estate sectors of the city are better positioned for cyclical growth than others.

The bottom line is that even if a certain region or a certain country is experiencing economic pressure, that doesn’t mean we can’t find cities and sectors that offer potentially attractive real estate investments. Student housing, rental growth and logistics in cities such as Berlin are only one example of investments benefiting from strong structural demographics that can potentially find attractive risk-adjusted returns for long-term investors.

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Endnotes

Sources


1
Bloomberg

2
IMF

3 Nuveen Real Estate

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Glossary

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 the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of -1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random. The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. With 1,853 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. The FTSE NARIET All REITs Index is a market capitalization-weighted index that and includes all tax-qualified real estate investment trusts (REITs) that are 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 investment performance of a large pool of individual timber properties acquired in the private market for investment purposes only. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. S&P GSCI Agriculture Index has been designed to provide an exposure to the agriculture sector in commodity asset class on a total return basis. The S&P Global Timber & Forestry Index is comprised of 25 of the largest publicly traded companies engaged in the ownership, management or the upstream supply chain 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.

Nuveen provides investment advisory services through its investment specialists.

This information does not constitute investment research as defined under MiFID. In Europe this document is issued by the offices and branches of Nuveen Real Estate Management Limited (reg. no. 2137726) or Nuveen UK Limited (reg. no. 08921833); (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN), both of which entities are authorized and regulated by the Financial Conduct Authority to provide investment products and services. Please note that branches of Nuveen Real Estate Management Limited or Nuveen UK Limited are subject to limited regulatory supervision by the responsible financial regulator in the country of the branch