The €10bn Dutch pension fund of postal company PostNL is switching part of its real estate portfolio to agricultural land in expectation of superior returns, with the possibility of contributing to more sustainable farming methods also seen as a benefit.
The fund wants to have around €350-400m invested in farmland, which corresponds to some 3.5-4% of the total investment portfolio. The farmland acquisitions will be financed by lowering the allocation to real estate.
The pension scheme has launched a new fund for the investment in cooperation with its fiduciary manager Kempen. Called the SDG Farmland Fund, it has €200m of seed capital from Pensioenfonds PostNL and is open for participation from other institutional investors.
The new fund can invest directly in agricultural land and in companies that own farmland, but also indirectly via investment funds.
A first €20m of commitments by PostNL has already been invested in olive orchards in Portugal, with another €20m still to be deployed. The new fund is currently investigating possible investments in Danish organic vegetable farming, American potatoes, barley and wheat as well as kiwi fruit in New Zealand.
“We first started considering this investment in 2019 when we discussed our illiquid investment portfolio,” said René van der Kieft, president of Pensioenfonds PostNL.
“We found farmland interesting as it overlaps with sustainable themes such as climate change, food safety and food security. We thought it worthwhile to delve into this further, also with an eye on diversification.”
Better than real estate
The pension fund compared farmland with real estate in an ALM study. While direct returns for the latter are rental income, for farmland there are leases and possibly part of the value of the harvest. The indirect return comprises the change in value of the farmland, which is comparable to property price fluctuations in real estate.
Van der Kieft said: “It turned out the expected return on farmland is slightly higher than for real estate, while the risks are similar. The return on farmland is 6-8% while we expect a return on real estate of 4-5% over the next period. The fixed costs are expected to be 1.2%, which is comparable to real estate investments.”
Another reason to choose farmland over real estate is that the former will contribute to achieving PostNL’s sustainability targets, Van der Kieft added.
“We will only invest in projects where there still is room for improvement on the sustainability front, such as reducing water usage and improving biodiversity. We expect concrete results from the farmers within a predetermined period,” he said.
According to Van der Kieft, it’s relatively easy to measure the ‘greenness’ of farmland.
“You can measure the amount of life in the soil and stimulate usage of natural fertilisers. You can also agree beforehand to rotate certain crops, to let certain parts of the land lay low for some time to allow natural flowers and plants to flourish. Besides, you can also require certain conditions for sustainable irrigation and retaining water.”
The investment fits with the SDG ‘Climate Action’, but also with ‘Life Below Water, ‘Zero Hunger, ‘Clean Water and ‘Sanitation and ‘Responsible Consumption and Production’, said Van der Kieft. “It provides us with an ideal opportunity to combine many SDGs.”
No forestry or cattle farming
The pension fund has explicitly excluded forestry as an investment because it expects significantly lower returns on this category. It has also excluded cattle farming.
Van der Kieft said: “We have found there are quite some risks involved with investing in cattle farming, for example on animal welfare and the use of subsidies on for example dairy products. We also focus on a mix of permanent and seasonal crops.”
The fund also explicitly looks at the future impact of climate change on farmland. As a result, the fund will only invest in land in the US, Canada, Europe, South Africa, Australia or New Zealand, said Van der Kieft.
By focusing on these relatively stable democracies, Van der Kieft said it will be possible to avoid major controversies. “This could happen if we invest in land that involves cutting trees and forcibly removing indigenous populations. That’s why we only invest in existing farmland.”
There remains a risk of government interference though, noted Van der Kieft. “Governments could for example change conditions for subsidies or water use, or expropriate the land which could negatively impact returns. That’s why we try to focus on countries with a relatively stable political climate.”
PostNL pension fund has opted for a bespoke solution from its fiduciary because existing funds did not meet their sustainability demands, said Van der Kieft. “These funds tend to also only have investments in just one region.”