© Getty Images – Coniferous forestry plantation in the Cairngorms National Park
Rural investments have performed well for investors in recent years – we believe the key to future strong returns is a well-diversified portfolio in both asset types and regions
World farmland has been a strong sector in the new Millennium. Our Global Farmland Index has recorded average annualised growth of 14.8% since 2002 and 6.6% over the past five years. The index, which includes a wide range of geographies and farm types, has recorded strong, steady growth with low global volatility. In itself, it illustrates the benefits of a mixed portfolio that crosses world regions and can therefore even out local fluctuations and variations in performance.
Core-plus – diversified agricultural portfolio
With core farmland investing opportunities in short supply and yield compression in the sector complete, the name of the game for core and core-plus investors is risk management through portfolio balance and diversification.
The global reach and the range of land-based enterprises in the world today, from food to energy production, offer this type of investor the opportunity to spread risk and maximise returns. A farmland portfolio can be spread across countries and regions, soil types, climates and enterprises. This enables organisations to mitigate volatility in markets, inputs and outputs to achieve stable incomes and values.
Pressure on commodity prices has been a common theme over the past five years, putting downward pressure on global values. Farmland values are less volatile than other commodities and were significantly less affected by the credit crunch in 2008. The long-term fundamentals still apply with increased food production (balanced by reduction in food waste) and competitive land use driving demand and making farmland an attractive longer-term investment.
The key to future investment performance is to increase unit production through land improvement and the efficient use of the latest technologies, balancing capital value growth with a reasonable risk profile. The right asset in the right market will yield positive returns for the investor in the long term. However, as with all investments, especially with a range of cultures, political administrations, ownership structures, tax regimes, foreign investment regulations, it is essential to understand global markets.
Value add – timber
Investors looking for a diversified product with good long-term credentials should consider forestry as an alternative ‘get 100% of your land back’ investment. Forest assets combine the production of timber with the security of land holding and have the unique benefit of adding value as the store of timber on a site matures.
The future value of forestry land is pegged to the price of timber, so it can provide a hedge against inflation over the longer term by giving core year on year growth. The price of timber is forecast to rise as the global population grows and increased demand drives inflation, especially as the stock of sustainably harvestable wood comes under pressure. Returns are realised either from capital growth of the land and subsequent sale of assets, or by harvesting the timber at maturity.
Although there are opportunities across the world, UK forests are an increasingly sought-after asset class. They benefit from good growth rates, a tax-efficient environment and a well-developed wood-processing industry that is currently undergoing a decade of inward investment to install state of the art mills across the country. The UK is the third-largest importer of wood products and, with domestic production at fairly constant levels, dependency on imports means global pricing trends will be important.
Recent UK forest performance has been excellent with the long-term annualised total return calculated at 9%, competing favourably with other asset classes. Although returns could come under pressure due to higher demand for the asset, growing timber is a long-term game and our view is that there is plenty of scope for growth in the sector over the next two or three decades. In the UK, investors have opportunities to structure for capital growth or tax-free income, depending on objectives. The scale of available investment opportunities is a limiting factor. The UK market only sees around £80 million of transactional activity annually. Investors looking to scale up to larger positions will find opportunity in other regions of the world where large portfolios are available, although individual country risk will also need to be considered.
© Getty Images – Cut timber
Opportunistic – Romania
The Romanian farmland market is developing rapidly as many Western European and Scandinavian investors continue to see opportunity in the current, relatively cheap, land values. The Romanian farmland market offers investors the chance to acquire high quality farmland at reasonable prices relative to the mature markets of Western Europe, including the UK.
Many farmland assets in the country have reached a level of maturity where barriers to entry that were present in the 1990s and early 2000s are no longer issues for new investors, giving the opportunity for good investment returns. These include clean title in tradable structures, viable tenants, experienced operators and viable access to infrastructure. Where previously Romania had been a frontier region for mainstream investors, it is now possible to source quality assets and viable long-term tenants with a substantial track record of performance.
Top quality arable land values range from €5,000 to €7,500 per hectare and the available assets include large farms with the key crops being corn, soya and wheat. Value can be added where water storage is available, giving the potential to convert dry land arable to irrigated vegetable land. In addition, as part of the EU, a CAP subsidy is available to Romanian agriculture.
© Getty Images – Brasov, Transylvania, Romania
Alternatives – energy
Although food production is an important, often primary use for farmland, it does offer alternative opportunities to enhance financial returns. These include issues around energy production.
Energy storage is set to play an important role in our electricity networks and will present new opportunities for property owners. Storage meets the need to balance variations in electricity demand and intermittent generation from renewable energy on an almost instantaneous basis. It offers commercial value, not only for utility and transmission companies, but end-users and property owners, including farm owners, via time-of-use bill management, increased PV self-consumption and energy arbitrage, demand charge reduction and backup power.
Kick-starting this movement are three multi-trillion dollar industries: IT, transport and energy, whose combined investments are improving energy densities, lifespans and driving down costs.
The market could be significant. Numerous commercially-driven projects are now appearing around the world, including commercial demand-charge management in San Francisco, distribution upgrade deferral in New York, as part of Germany’s ambitious energy transition project, and via the first commercial contracts awarded by the UK’s National Grid in August 2016.