Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. REAL ESTATE
October 16, 2017 01:00 AM

More investors turn to farmland, debt strategies

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Gary Sayers
    Jack Gay said some investors are looking at commercial mortgage investments as a supplement to their equity portfolios.

    Two relatively small corners of real estate manager portfolios grew the most in the year ended June 30, reflecting a focus on sectors that could help investors insulate portfolios against a downturn.

    While the sectors remain a relatively tiny slice of managers' total assets under management, farmland and real estate debt strategies all rose in the year ended June 30.

    Real estate debt sectors tracked by Pensions & Investments include hybrid debt, mezzanine, loans and mortgages.

    Worldwide mezzanine assets were up nearly 29% to about $16 billion; and mortgages were up 8% to $292 billion. Also, worldwide farmland assets grew by 10.2%, and worldwide timber assets were up 1.3% to $31.8 billion. U.S. institutional tax-exempt investments for farmland was up 11.1%.

    Mezzanine assets managed for U.S. tax-exempt institutional investors were up 31.4% to $6.2 billion; loans were up 19.7% to $1.7 billion and mortgages grew by 7.2% to $65.5 billion.

    Nuveen, formerly TIAA Global Asset Management, topped the list of mezzanine managers for U.S. tax-exempt clients $3.1 billion, a 56% increase. Brookfield Asset Management was up 26% to $687 million and PGIM, the asset management arm of Prudential Financial Inc., was up 108% to $594 million.

    Loan assets were also up, in part due to the addition of Aviva Investors, which manages $11.4 billion in worldwide loan assets. Aviva did not participate in last year's survey.

    Madison Realty Capital headed the list of loan managers with $857 million. Madison did not complete a survey last year. UBS Asset Management Real Estate & Private Markets was second, with assets down 37% to $604 million, and Nuveen was in the third spot with loan assets dipping 14% to $122 million.

    Nuveen led institutional tax-exempt institutional mortgages, with assets up 23% to $26.3 billion. PGIM was next, with assets down 1.5% to $15.9 billion. New York Life Investment Management was third with a 3.3% increase to $3.6 billion.

    "We continue to see broad interest in commercial mortgages across the risk spectrum from our clients, from senior whole loans through higher-yielding subordinate debt," said Jack Gay, Nuveen's managing director and global head of commercial real estate debt. "Mortgages continue to offer strong relative value as compared to fixed-income alternatives and are an attractive supplement to equity investments, particularly as we move through later stages of the real estate cycle."

    At the same time, Nuveen's investments in mortgages increased due to "a strong pipeline" of opportunities during the survey period, he said.

    Nuveen is also increasingly investing in mezzanine and subordinated debt, Mr. Gay said. "Over the past few years we have increased our subordinate debt (B-note and mezzanine) activity, where we're lending higher in the capital stack, and in some cases taking transitional asset risk to achieve equity-like returns," he said.

    The amount of capital focused on real estate lending is also increasing. "The lending market continues to exhibit an abundance of capital across the risk spectrum," Mr. Gay said.

    Non-bank lenders including real estate credit managers and insurance companies are stepping into the breach left by commercial banks and commercial mortgage-backed securities issuers with regulatory lending restrictions, Mr. Gay said.

    The lending market continues to exhibit an abundance of capital across the risk spectrum, he said.

    "As a lender, we expect to do business throughout the capital stack through our core, mezzanine and floating rate transitional bridge programs as we continue to see our clients increasing allocations to debt," Mr. Gay said.

    Mezzanine increase

    David Durning, Chicago-based president and CEO of PGIM Real Estate Finance, PGIM's credit business, said PGIM is increasing its mezzanine investments. "The scale of mezzanine is relatively modest but we are more active in that space and will continue to be more active."

    He said PGIM executives are seeing attractive opportunities in the strategy, and there is interest from clients. What's more, the equity and debt real estate sectors are not correlated, which makes it an attractive investment, he added.

    However, not all investors will want to invest in mezzanine. Two types of investors are drawn to real estate debt — investors that are using it as a fixed-income substitute, looking for income-producing strategies that provide higher returns than bonds, and investors turning to real estate debt to get a higher yield than earned from real estate equity strategies, Mr. Durning said.

    Investors using real estate debt as a fixed-income substitute prefer core debt strategies such as core mortgage debt, while real estate investors turn to non-core debt strategies such as mezzanine.

    Still, there were headwinds in the real estate debt space last year. A 14% decline to $53 billion in real estate transactions worldwide has resulted in a decline in financings, Mr. Durning said.

    Anton Pil, New York-based managing director of J.P. Morgan Asset Management and managing partner of the global alternatives division, said his view of real estate debt is more nuanced. For example, depending on the risk of the property being financed, a mezzanine investment may be safer than investing equity, he said.

    "Mezzanine attracts capital that doesn't want to take the equity risk of higher-risk projects," Mr. Pil said.

    Especially at the tail end of a real estate cycle, equity investors might have their investment wiped out if something goes wrong, while the mezzanine investor might end up owning the property, he explained.

    Meanwhile, investors seeking to invest in first-lien mortgages are facing challenges from the Federal Reserve, which is in the process of reducing its balance sheet. This reduction includes the Fed allowing up to $4 billion a month in mortgage-backed securities and agency debt to mature and not be reinvested, with that monthly cap rising to $20 billion.

    This level of mortgage supply introduced into the marketplace will have "a ripple effect" on real estate debt strategies, reducing yields as borrowing rates decline, he said. That's good news for borrowers but not for lenders.

    Even while investors try to avoid some of these land mines in some real estate debt strategies, they are beginning to have more conversations about real asset strategies including real estate, timber and farmland and their role as inflation hedges.

    "An increasing point of conversation with investors is the real asset nature of real estate. It's becoming a prevalent conversation as investors are realizing that inflation is no longer theoretical. It may be on the horizon," Mr. Pil said.

    Top farmland managers

    Nuveen topped P&I's list of farmland managers for U.S. tax-exempt clients this year with assets up 12.5% to $9.5 billion. PGIM was second with assets up 6.4% to $1.9 billion, followed by Hancock Agricultural Investment Group, with farmland assets up 3.7% to $1.55 billion. UBS was fourth on the list with $1.4 billion, up 20.5%.

    James McCandless, managing director and head of real estate for farmland at UBS Farmland Investors LLC, Hartford, Conn., attributed a portion of the increase to new acquisitions and some appreciation of the firm's farmland portfolio.

    Farmland is divided into three segments: commodity crops such as corn and soy; permanent crops including fruit trees and vines; and vegetable producing properties, Mr. McCandless said. Permanent crops in the U.S. gained this year as did vineyards. UBS invests in properties producing premium varietals mainly located in Napa, Sonoma and Monterey counties in California.

    "The prices of (premium varietal wine grapes) continue to increase, which translates into higher valuations of the property," Mr. McCandless said.

    Vegetable growers also did well, pushing up returns in that sector.

    However, commodity crops have been flat, he said. This was a factor of dropping commodity prices over the past two to three years and caused farmers, who drive the market, to pull in their horns a bit and stop buying land, leading to flat land prices, Mr. McCandless said.

    Investors are looking to take advantage of secular trends around the world, said PGIM's Mr. Durning. For example, a growing middle class in China is increasing the demand for higher-quality food, he said.

    "Agriculture has always been part of the strategy," Mr. Durning said. "We've seen the opportunity over the last five years to increase the scale of (PGIM's agriculture investment)."

    PGIM includes timber in its agriculture portfolio. "Returns and diversification drives investor interest in farmland," he added.n

    More investors turn to farmland, debt strategies

    Related Articles
    Reflation catalysts for real assets
    Average target real estate allocations surpass 10% for first time — survey
    Quest for steady income helps push worldwide assets up 8.7%
    Current investment cycle will be long, with soft landing – report
    Real estate firms getting foot in technology door
    Pennsylvania Municipal Retirement seeks timber manager
    Commentary: Including U.S. commercial mortgages in fixed-income portfolios
    Mezzanine managers losing places at table
    Caisse's Ivanhoe Cambridge targets warehouses to boost assets 33% in Amazon era
    Real estate investors face lower returns, possibly lower fees – LaSalle
    Recommended for You
    Signage for AMP Ltd. adorns the top of company's Bourke Place building in the central business district of Melbourne, Australia
    AMP Capital Wholesale Office Fund unitholders vote to switch to Mirvac
    Heitman appoints chief diversity officer
    Florida storm damage
    Climate change knocking, but not all managers home
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    July 29, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit