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How do rising interest rates affect natural capital investments?
Our analysis provides evidence of timberland and farmland’s resiliency through rising interest rate environments and associated contractionary economic environments.
To address persistent U.S. inflation, the Federal Reserve initiated a series of rate hikes in March 2022. By May 2023, the key short-term interest rate had increased by 5.0%, reaching its highest level in 16 years. Recognizing that the impact of higher interest rates on portfolios will vary by sector and investment characteristics, many investors are wondering what the current rate environment means for their natural capital portfolios.
In this paper, we examine the impacts of a rising interest rate environment on natural capital investments: U.S. timberland and U.S. farmland. We review past performance through periods of rising rates, then conduct a deep dive into the individual asset classes to examine the mechanisms through which higher interest rates are translated most immediately and directly to rate-sensitive market segments. Finally, we conclude with a summary of what this means for natural capital investors.
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Our research shows that farmland and timberland investments continue to serve as a hedge against inflation and provide tools for investors to build resilient portfolios.
Over the past year, impacts related to the Covid-19 pandemic and the war in Ukraine have produced major supply chain disruptions contributing to market volatility, historically high inflation rates and aggressive monetary policies.
The earth’s natural capital can be thought of as a stock of assets—air, lands and waters and their biodiversity— that yields a flow of benefits or ecosystem services over time. The flow of these benefits includes provisioning services such as food, fiber and timber as well as a broad range of regulating, supporting and cultural ecosystem services that drive the global economy and human wellbeing.
Endnotes
1 Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, May 15, 2023.
2 See for example Goolsbee and Syverson, 2023 (https://www.nber.org/papers/w30845). Modular mass timber construction may offer some relief to productivity challenges in the construction sector, and climate benefits in addition (https://www.nuveen.com/global/insights/alternatives/mass-timber).
3 Debt-to-equity ratios for 2022 and 2023 are forecasts.
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A word on risk
As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets, including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Nuveen provides investment solutions through its investment specialists.
