Post-coronavirus challenges to real estate’s reputation as a dependable store of value could draw more investors into farmland markets, Joe Azelby, head of real estate and private markets at UBS Asset Management, told PERE‘s sister publication Agri Investor.
“Whenever you have a crisis, it is a reminder for people to diversify more than they have,” Azelby said. “People are going to scratch their heads and say: ‘Geez, maybe I have a little too much real estate. What else is out there, that, perhaps, is not going to behave in a similar way if there are more covids to deal with in the future?’”
Azelby – who joined UBS in March 2019 after approximately one year as senior partner and head of real assets at Apollo Global Management – highlighted that the hotel and retail subsectors been particularly hard hit by covid-19. Uncertainties surrounding the potential spread of future pandemics and resulting changes in demand for office space, he said, have further clouded the outlook for some real estate strategies.
As institutional investors continue to seek “pockets of calm” amid the turmoil, farmland’s resilience during the global financial crisis and the pandemic’s immediate aftermath is likely to be top of mind, said Azelby.
“People buy real estate around the world at sometimes ridiculous prices as a place to store capital. We certainly saw that in New York – where five years ago people from all over the world were buying ridiculously large condos at ridiculously large prices.
“I just think people are going to look for other areas and places to store value and perhaps we’ll see the high-net-worth space engage in the farmland discussion.”
Azelby oversees more than 500 employees managing more than $100 billion in assets across 14 countries. Real estate accounts for between 80 and 90 percent of assets and revenue managed within the Real Estate and Private Markets platform, according to Azelby, who also oversees UBS’s general private equity and infrastructure investments that account for much of the remainder.
Azelby said that while UBS and other investors would like to have more exposure to food and agriculture, the market faces limitations imposed by the lack of what he called “scalable doorways.” In farmland, for example, he said UBS has limited its acquisitions to properties with very specific characteristics and most deals have ranged between $5 million and $20 million each.
UBS has begun a process of thinking about broader opportunities in food and agriculture, Azelby said, adding that he expects the post-covid environment will be good for those attempting to make significant changes to agricultural supply chains.
“We think there is a huge amount of technology that can be applied to farm operations,” he added. “And then, like other industries, there is a huge amount of infrastructure between the farmgate and the table at home.”
Any expansion into other ag-related markets, said Azelby, would likely draw on capabilities present within his team at REPM, including those on the real estate front.
“I view food and ag as part of real estate, which is the land component. Obviously, farm operations have a private equity element. Then you have the whole infrastructure that is required to process, store, transport and package food – there is a huge infrastructure in the food and ag space. Then there is a private equity component; there are companies that focus on the food and ag sector that are certainly interesting and viable investments.”
Before joining Apollo, Azelby played one season of professional football as a linebacker for the Buffalo Bills and spent 18 years as chief executive of JP Morgan’s Global Real Assets business. In 2012, he published a white paper entitled The Realization. It predicted a secular shift to real asset allocations similar to the diversification away from bonds and into equities that followed regulatory changes in the late 1960s.
The paper predicted real assets would see rise from approximately 5 to 10 percent of institutional portfolios to as much as 25 percent in the decade ahead.
Azelby told Agri Investor the development of real asset markets thus far has played out largely along the lines of what he had expected. He estimates the real asset component of an average broadly diversified portfolio has in fact risen from about 10 percent to approximately 20 percent over the past eight years.
In The Realization, Azelby categorized real asset categories by return expectations, dividing less risky “core” investments likely to yield between 8 and 11 percent total returns from “opportunistic” real assets capable of producing 14 to 20 percent returns.
“If you look going forward, all of those numbers should be lower,” explained Azelby when asked to update return expectations for 2020. “Most of the world has moved to a close-to-zero interest rate environment. Think of real assets as providers of real return and the baseline from which you measure those returns has fallen precipitously, and gone negative in some parts of the world. I would shift the whole curve down by 300 basis points just given what we have seen in the interest rate environment.”