Earlier this year, while addressing a group of farmland investors at the Peoples Company’s Land Investment Expo in West Des Moines, Iowa, capital markets analyst Dennis Gartman declared that land was “the investment I’d probably stay away from.”
Today, after the turbulent performance of equities following the recent China stock market crash, Gartman has reversed course.
Equities have rallied to “dangerous” levels while land values “have moved hardly at all,” says Gartman, who edits and publishes The Gartman Letter.
Given the volatile nature of the stock market, says Gartman, “I would much prefer owning land at the ‘expense’ of equities.”
I would much prefer owning land at the ‘expense’ of equities.
Many institutional investors from around the world appear to be in agreement. From Australia to the U.S. and Eastern Europe, farmland across the globe is whetting the appetites of real estate investors who are planting their money with the hopes of yielding high returns in the future.
Pension funds like the Cummins UK Pension Plan and the New Mexico State Investment Council are part of a new group of investors who are targeting farmland investments.
Farmland investments appeal to pension and sovereign funds with significant amounts of cash, as they are typically not correlated to core asset classes like shares and bonds, says Danny Thomas, regional director of agribusiness transactions, valuations and advisory services for CBRE.
“The logic of being invested in ‘hard assets’ in times of economic or political uncertainty is certainly nothing new,” says Thomas. “But when extended to agricultural land, there are a great many investors from European, Asian and Middle Eastern countries who favor investing in this asset class—not so much for the immediate economic returns, but rather for its perceived safety as a good place to preserve capital.”
Lands of Opportunity
There is a lot of investor interest in the U.S., which exported a record $152.5 billion in agricultural products in fiscal year 2014, while institutional investment in farmland reached $2 billion in recent years, The Wall Street Journal reported. While that amount barely made a dent in the $2.4 trillion U.S. farm real estate market, farmland investments in America boast annual returns of 12 percent, according to The Economist.
With the global population projected to reach 9.7 billion by 2050, up from 7.3 billion today, demand for food—and better-quality food such as organically grown crops—will increase along with it. The world will need to increase food production by 70 percent to accommodate this population growth.
If wealth grows, too, countries that produce premium products (like the U.S. and Australia) are best situated to capitalize on this trend, says Thomas.
“However, the extent to which this manifests itself in increased property values is somewhat unknown,” Thomas adds.
In recent years, investors have also targeted Spain, taking advantage of a drop in land prices—predominantly olive groves and vineyards—after the country’s real estate bubble popped, says Patricio Palomar Murillo, director of alternative investments and advisory offices at CBRE in Madrid.
“We have also had many different investors from China, Russia and even from the Philippines that have purchased wineries either in Ribera del Duero, Rioja and the Sherry producing region in the south of the country,” Palomar says.
“Dutch companies continue investing in the east coast of Spain, but in this case they are more focused on high-quality production, with several projects developed and oriented toward the gourmet type vegetables and fruit-processing business, mainly in the greenhouse zone of Almería.”
The Next Big Markets
Central and South African countries are receiving a lot of capital for agro-industrial projects, but East African economies are suffering a major slowdown due to political instability, says Palomar.
“Zimbawe and Angola are really fantastic destinations for cereal grain production, while South Africa is in high demand for those investors that are betting to compete with Europe in the production of typical Mediterranean commodities,” Palomar says.
Investors are continuing to show interest in Central and Eastern Europe, largely due to the high subsidies those countries are receiving from the EAP (European Agricultural Policies), according to Palomar.
Too Good of An Opportunity to Miss?
In addition to the U.S., investors are looking for opportunities in areas that include Australia, South America and Central Africa.
Hassad Food, part of Qatar’s sovereign-wealth fund, has invested in farmlands in Australia, as have other global investors. But all this outside interest in Australia’s farmland (the country estimates that 10 percent of its farmland is owned by foreign interests) has caused the country to change its policies, requiring overseas investors to declare their holdings of agricultural land.
I think most investors will work their way through the regulatory requirements and ultimately they won’t be an impediment to investment.
Such a move shouldn’t be perceived as a gesture to discourage foreign investment in its farmland.
“Most countries, including the U.S., have equivalent or more stringent controls of foreign ownership,” says Thomas.
“I think most investors will work their way through the regulatory requirements and ultimately they won’t be an impediment to investment,” he adds.
If anything, the institutional barriers to farmland investments have declined as technology has advanced.
“We now have the ability to look at a property from the sky and know as much as we can about it,” says Bruce J. Sherrick, director of the TIAA-CREF Center for Farmland Research at the University of Illinois. “I already know more about properties with three clicks than what I used to be able to by driving six hours and walking around an actual property—and that really reduces the barriers to revaluation.”
“It’s not a good or bad thing for farmers,” adds Sherrick. “Their cash runs more accurately as a result.”
20 June 2017 by Sam Shillet