Farmland is an increasingly popular asset class – but one that comes with its own type of challenges.
Tim Hornibrook, executive director at Macquarie Agricultural Funds Management, Macquarie Infrastructure and Real Assets, told IPE: “Historically, agriculture has been portrayed by the media quite negatively, whether it has been about price volatility, extreme weather events or the average family farmer struggling to make ends meet. That has in some ways tainted people’s perception of the sector.
“But the macro-environment for agriculture is a very attractive one, and those risks, while they can never be removed, can be managed. While the price is going to vary year to year due to predominantly environmental factors, it is the long-term demand that is attracting people to the sector. The asset class also has a relatively low correlation to financial assets and an attractive return profile as a standalone asset, with the majority of the balance sheet actually appreciating.”
Hornibrook’s comments come in the wake of the research study by Aquila Capital, which revealed that 23% of institutional investors are looking to increase their exposure to farmland over the next year, while a further 74% will maintain farmland investment at current levels.
But while investors may be increasingly interested in farmland, according to the survey, it currently represents only 1.3% of their portfolios.
However, several large institutions now invest in farms, including sovereign wealth funds such as Temasek and the China Investment Corporation.
Aquila’s study shows that, historically, the three most popular investment vehicles to access farmland have been specialist investment funds with 53%, ahead of closed-end funds with 40% and club deals/co-investments with 20%.
Of those that have invested in farmland over the past 10 years, however, 57% said they were disappointed with the performance of closed-end funds, 42% with specialist investment funds, 29% with club deals and 14% with direct ownership of farms.
This has forced a rethink in the investment models used by investors. Aquila Capital’s response has been to offer co-investment structures that give farmers a share in the operation to align investor and manager interests, rewarding farmers for high performance while giving them access to capital.
Detlef Schoen, group head of farm investments at Aquila Capital, said: “The study highlights that one of the issues with funds in the agricultural sector is the lack of track records and realised returns.”
Hornibrook agrees with this – citing lack of track record and education as the two main reasons why interest in the asset class continues to outweigh any actual commitments made.
He said: “It is not an easily investable asset class for investors. It is not like infrastructure, where mega projects allow investors to allocate large amounts of capital. Because it is such a fragmented sector, we are typically aggregating a number of small assets into investable parcels.
“The number of managers that have funds acceptable to institutions is also limited. However, if they wait for the track record and a large universe of institutional quality managers, the question is whether the return profile will be the same.”
Hornibrook recommends investors diversify geographically and climatically to reduce weather risk and matching an investor’s appetite to risk relative to geography.
He believes investors can avoid negative headlines related to land-grabbing and similar issues by investing in well-established agricultural markets.
Aquila surveyed 71 European and UK institutional investors in October.