Timber, farmland assets continue to slide

Worldwide farmland and timber assets of real asset managers as well as assets managed for U.S. institutional, tax-exempt clients tumbled again in the 12 months ended June 30, according to Pensions & Investments' annual survey of real estate managers.

Both categories continued a slide that was reflected in last year's survey results. Farmland managed for U.S. institutional investors fell 12.1% to $12.4 billion in this year's survey, and timber assets declined 0.5% to $15 billion.

The top three timber managers for U.S. tax-exempt institutions all saw AUM drop in the year ended June 30. Campbell Global LLC topped the list of timber managers with assets dipping 1.1% to $3.5 billion, followed by Hancock Natural Resource Group, a unit of Manulife Investment Management Co., with assets down 6.6% to $3.2 billion, and Nuveen LLC, with timber assets down 9.7% to $2.3 billion.

But demand for timber products has been strong for the year ended June 30, managers say.

"Timberland returns in the second half of 2019 and the first half of 2020 have been supported by surprising strength in underlying markets for forest products, particularly building products, such as lumber and wood panels," said Tom Sarno, senior managing director and global head of timberland investments at Hancock Natural Resource Group, in an email.

The NCREIF Timberland index had a 0.34% rolling one-year return for the period ended June 30. Although the appreciation portion of the return was down 2.1% , that was offset by the 2.47% earnings before interest, taxes, depreciation, and amortization portion for the period.

Residential construction has boosted demand for timber-based building products, Mr. Sarno said. "U.S. housing starts recovered sharply from a brief COVID-19-related drop in March and April and are currently at pre-global financial crisis levels," he said. "The COVID-19-related increase in a home-centered lifestyle, including work from home, home-based education and entertainment, and multigenerational family living, have all contributed to the need for larger and reconfigured home space."

At the same time, the increased use of teleconferencing is allowing developers to build in more affordable suburban and rural areas rather than in city centers, which have a more limited supply of land.

These developments have helped privately held timberland investments generally sustain their value in 2020, Mr. Sarno said.

Farmland AUM also fell during the period, as did returns for the year through the second quarter. The NCREIF Farmland index returned 3.85% for the year ended June 30, down from 5.67% for the four quarters ended June 30, 2019.

Nuveen topped the list of farmland managers for U.S. institutional tax-exempt clients with assets down 13.5% to $7.7 billion. Hancock Natural Resources was second, with farmland assets up 11.1% to $1.9 billion, and UBS Asset Management was in the third spot with assets flat at $1.6 billion.

"Privately held farmland investments have generally sustained their value over the past 12 months and during 2020's COVID-19 environment," said Oliver Williams, global head of agricultural investments at Hancock Natural Resource Group, in an email.

While agriculture was deemed essential in all countries and allowed to continue to operate during the COVID-19 shutdowns, agricultural commodity markets did experience pandemic-related disruptions, Mr. Williams said. Changes in consumer behavior resulted in reduced demand for corn-based ethanol production due to a significant drop driving patterns, early in the crisis, he said. There also was a massive shift to home-cooked meals from eating at restaurants and an increased demand for fresh foods and food products with positive health attributes, Mr. Williams added.

The pandemic has resulted in more demand for information on the sustainability of agricultural products, he said. "Taken together, the markets for agriculture properties have proven to be surprisingly resilient in 2020, given the ongoing trade issues," Mr. Williams said.

Even so, what holds agriculture back is lack of supply, because long-term investors prefer to hold onto farmland in the right areas, said Eric Adler, London-based chairman and CEO of PGIM Real Estate and chairman of PGIM Real Estate Finance.

PGIM was fourth on P&I's list of farmland managers running assets for U.S. institutions. In the year ended June 30, PGIM's farmland AUM more than doubled, up 110% to $1.1 billion.

"There's a lot of appetite from clients to get into the agriculture space" because as a real asset it is believed over time to be an inflation hedge, Mr. Adler said.

If inflation rises, the price of food goes up as well, he said. "The challenge is finding farmland for sale."

Mr. Adler attributed PGIM's farmland growth to winning market share from other managers. PGIM executives had wanted to make more farmland investments and then the pandemic hit.

Sellers generally are family owners who want to get out of the business and put their land up for sale, Mr. Adler said. "If you're an institution, you don't want to sell. You want to hold."

Despite the challenges, PGIM executives would like to grow the business, he said, "but it's hard to get scale."