Buy-and-lease gains traction among Australian investment firms

Own-and-operate strategies dominate the agri fund market in Australia, but investment firms are now paying increased attention to buy-and-lease structures.

Australian agriculture investment firms and consultants are increasingly considering employing buy-and-lease investment models in a market largely dominated by own-and-operate investment strategies until now.

The reason for this shift in approach is a combination of investor demand for more passive assets, changing fundamentals for existing agricultural operators, improving land valuations, the ensuing generational shift in the farming community, a decreasing Australian dollar and falling interest rates, according to sources.

“We have added to our capabilities by not only focusing on own-and-operate land investment, but also on buy-and-lease investments where we see opportunities growing in markets such as Australia and New Zealand,” said Griff Williams, investment director at Milltrust, the global farmland fund manager. “The farmland leasing market is certainly not developed in these markets yet, but we have noticed that local agricultural operators are starting to see the benefits of having large scale investors invest in the land assets, while still expanding their business and doing that they do best.”

“At the same time, there are a number of large institutional investors that are happier not to take on the operational risk of production but to instead accept a steady annual lease rental stream and the prospect of significant capital uplift in the value of their asset,” he added.

Successful buy-and-lease deals already executed in Australia have involved large agribusinesses partnering with investment firms. Examples include Murray Goulburn, the dairy processor, and a Scandinavian pension fund; Adveq Real Assets, a Swiss fund of funds house, and Olam International, the Singaporean agribusiness; and Inghams Enterprise, the poultry producer, and private equity firm TPG.

For these large agriculture producers, the model enables them to expand operations and thus earnings, without the capital-intensive burden of buying and owning more land. Family farmers can also continue to farm their land while releasing some capital under a leaseback model, where they are both the seller and the tenant.

“There is and will be plenty of new leasing opportunities coming to the market as Australia starts to mimic the US Midwest model,” said Marcus Elgin, executive chairman of AAG Investment Management, who was responsible for the Murray Goulburn deal. “We will see more and more passive owners of land providing land to farmers and agribusinesses. Farmers have started to realise that they don’t want to be exposed that much capital and would rather use their capacity to make 7x cash returns on land they don’t own.”

For Andrew Hill, co-founder of National Land Lease (NLL), the leasing intermediator company, this development has not come as a surprise; he launched NLL last year with his brother Stuart on the back of this shift in sentiment. Attitudes towards leasing differ between domestic and overseas investors, however, as some prefer to enter into a joint venture instead of a pure leasing arrangement, according to Hill.

“Those that are interested in a pure lease are often domestic businesses looking to secure more land to build their business, although a lot of large enterprises we speak to are more interested in forming a joint venture with an investor than in purely just leasing the land to them,” he said. “Foreign groups are also often more interested in joint ventures to secure supply of a certain product – in our case it’s mainly been beef. And then on the other side you have investors that want to own the hard asset or infrastructure over a long time frame and these are often overseas investors.”

“It is not an easy marriage to make, however, as investors often have high return expectations and so you have to link them with a business that can sustain that lease for a long time,” he added.

While bullish about the prospects of the land leasing market in Australia, Hill admits it could still take some time for the local market to embrace it. “It’s taken a while for people to understand and some people find it tricky, but people’s mind sets have been changing a lot over the last 12 months,” he said. Hill’s parent company Australian Agribusiness Partners works as an intermediary between potential overseas and local partners interested in both acquisition and leasing opportunities.

And Elgin raised some concerns about the buy-and-leaseback model, whereby land owners sell land to rent it back and continue to operate on it.

“Leasebacks are a much trickier thing and often have an ugly outcome in the end because the seller is probably leasing the land back as a means to achieve a sale so their heart is not in it and their brains are already off the farm. This means that after the initial leasing contract expires, they are likely to leave,” said Elgin.

Finding tenants can also be very tough, according to Milltrust’s Williams, who added that it might be too soon to pursue a buy-and-lease model in some other markets globally.

“It can be problematic in some developing countries because there is not such a long tradition of land price appreciation and there is not the depth of tenants to choose from; it’s crucial to get the right tenant and this demands extensive due diligence and negotiation on behalf of the investor,” he said. “Buy-and-lease is better suited to developed markets such as Australia and New Zealand.”