Nuveen is rapidly deploying capital into the energy transition as part of its $184bn real assets platform. Christopher Walker speaks to the firm’s real assets chief
This week, Nuveen announced it had carried out “significant risk transfer” (SRT) with NatWest Bank relating to 35 project finance loans in eight European countries worth £1.1bn (€1.29bn). The SRT, which allows NatWest to deleverage its balance sheet, was the third investment made for Nuveen Infrastructure’s Energy Transition Enhanced Credit (ETEC) II.
ETEC II aims to partner with like-minded institutions to finance the energy transition in the UK and continental Europe and is part of Nuveen’s growing clean-energy infrastructure business.
Energy transaction is one of Nuveen Infrastructure’s two highest conviction themes alongside in digitalisation – particularly the rapid growth demand for data centres driven by AI. “We continue to focus on capital deployment across these themes in our third-party funds and partnerships,” says Mike Sales, CEO of Nuveen Real Assets.
Nuveen recently partnered with Digital Bridge, Allstate and Edgewater to form a joint venture with an initial footprint of six data centres in three markets. Today, its portfolio has grown to include 65 data centres across 29 markets.
As Sales sees it, the infrastructure market is “balancing the macroeconomic impacts of inflation, higher interest rates and a more challenging fundraising market with resilient underlying assets and business models supported by long-term tailwinds”.
He says: “Global support for the energy transition remains very high, and energy security and independence is a key issue in Europe and most Asian markets. Our specialist clean-energy strategies remain focused on the thematic across market cycles and the numerous elections taking place this year.”
However, the surge in electricity demand from industrial users, vehicle electrification and data centers “cannot be immediately served by renewable energy alone”, Sales says. “Therefore, utilities and regulators are re-evaluating the role of natural gas as both a grid stabiliser and affordable source of dispatchable generation. This is leading us to re-evaluate natural gas-connected infrastructure and related risks in certain portfolio strategies.”
In addition, to boost the energy transition, Sales thinks “there needs to be an acceleration of the development and adoption of new critical technologies”. These areas include low-emissions hydrogen, sustainable aviation fuels and direct air capture. Nuveen is “monitoring these opportunities as they have yet to reach sufficient maturity for our portfolios,” Sales adds.
Higher interest rates and costs are “key risks that continue to drive underwriting caution”, Sales says, but he anticipates staying in a “more risk-on position” for two primary reasons. “Powerful underlying trends provide fundamental support to many of our investment cases and are creating growth capital needs for existing assets and platforms,” he says. Secondly, “super-core and core assets have been slower to reprice with core-plus and value-add deals offering more interesting value in most markets”.
From real estate debt to farmland
Through both organic growth and strategic acquisition, Nuveen has built a real assets platform managing $184bn (€167bn). It is the world’s biggest investment manager in farmland, in the top five real estate managers and the top 20 in infrastructure.
Overall, Nuveen manages more than $1.2trn of public and private assets, including on behalf of its parent company, TIAA, which is itself known for managing money for not-for-profit institutions such as universities. Nuveen’s ownership is significant, says Sales. “The thing we hear most frequently from clients is that they choose to partner with us due to our inherent client alignment via our parent company TIAA.”
In real estate, Nuveen continues to favour real estate debt over equity. “As the interest rate environment has stabilised, lenders have decent pricing power and rate cuts appear on the horizon,” Sales says. Nuveen is also “focused on global cities experiencing growing, educated and diverse populations with a particular focus on the health care, industrial and housing sectors”.
Sales highlights two particular areas of opportunities: US medical offices and global senior housing. “Medical offices enjoy low vacancy rates, a restrained supply pipeline and the demographic tailwinds of an ageing population,” he says. “Senior housing benefits from the same demographics, and we believe fundamentals are improving given the slow pace of new construction.”
Sales believes private real estate markets are experiencing a key inflection point, and headwinds have mostly faded. “We continue to observe signs of distress, especially in the office sector,” he says. “However, we see more positive signals for the asset class as a whole – most global rate increases are behind us, property sales show signs of increasing and private equity buyers have been re-entering the market to take advantage of distressed opportunities. From a valuation perspective, prices have been declining for well over a year, and we think real estate is in a bottoming process.”
Sales is “particularly positive towards farmland as a long-term investment”. He says: “The sector benefits from structurally higher inflation trends and growing food scarcity. In particular, we see compelling opportunities in US row crops, which are experiencing high demand relative to supply.”
A favourite natural capital investment is La Crianza, a hazelnut property in Chile. Thanks to a long-term marketing agreement with AgriChile, a Ferrero subsidiary, “we were able to secure an asset with links to a reputable global company”, Sales says. “Furthermore, the US dollar benchmark pricing minimizes currency risk in income returns, providing an added benefit to our investors.”
Sales says the fundamentals for natural capital are “very positive”, noting forecasts from the Food and Agriculture Organization of the UN for a global population of 9.7bn people by 2050. “This population increase comes with serious resource demand increases of around 60% more calories, 100% more protein and up to 200% more wood and fibre, which will need to be met by suppliers, all in the background of decreasing land per capita, due to urbanisation.”
