Industry players tell me the Australian farmland index is an important first step in measuring returns on institutional investment as IRRs near 24 percent
The Australian Farmland Property Index, launched last month, gives investors into Australian agriculture a long-awaited tool to measure their investments against other asset classes.
As he approaches “semi-retirement”, Frank Delahunty, the coordinator of the Index who has a long history in Australian agricultural investment as a principle with DIRT Management and the Sustainable Ag Fund, tells me that launching the index has “been in the back of my mind for a long time”.
“This is long overdue,” he says. “If agriculture ever wants to be competitive against other asset classes, investors need to be able to measure performance.”
The index is based on the National Council of Real Estate Investment Fiduciaries (NCREIF) index in the US, using the same methodology with minor tweaks for the Australian market.
To kick things off, six fund managers whose experience in the market ranges from several years to about 20, have agreed to share data on a group of nearly 50 corporate farms that together total more than $827 million in asset value, and whose quarterly performance will be aggregated into the index.
They are Growth Farms, Blue Sky Water Partners, goFARM Australia, Rural Funds Management, Australian Agribusiness Group (AAG) and Hancock Agricultural.
While the index isn’t meant to represent a watershed moment for the industry, it’s “a necessary step in the continuing evolution of a robust Australian agricultural investment sector”, says Michael Blakeney, investment director for Blue Sky.
The Australian rural land market comprises approximately 400 million hectares with a June 2014 estimated value in excess of A$257 billion, according to data from the Australian Bureau of Statistics.
But the vast majority of the farmland is in private hands, and 99 percent of the more than 134,000 agricultural production businesses in Australia are family owned, the National Farmer’s Federation’s Farm Facts: 2012 shows.
The index is meant to measure returns on institutional investments, which sources estimated would fall below 10 percent of the total market, and many larger fund managers haven’t yet signed on as they wait for the index to grow.
But every market needs to start somewhere. The US index for instance launched in 1990 at a relatively paltry $350 million, but it has grown to $7.8 billion.
“We aren’t suggesting that it’s a comprehensive measure of Australian institutional returns, but it’s a great first step,” Blakeney says. “We are quite confident that the number and depth of properties in the Australian index will grow over time.”
The index is geared towards superannuation funds, banks, universities and property valuers looking to size up agriculture investments against the alternatives.
Following the announcement of the index, Damien Webb, head of Fixed Income & Real Assets with the not-for-profit Australian superannuation fund First State Super, noted that it would “help bring transparency to the performance of the sector that is currently not available”, calling it a “critical step in providing greater confidence to potential investors”.
The Australian index charted particularly strong returns (see chart below) in the 12-month period ending in June 2016, which shows an average return of 23.9 percent pre-fees, consisting of 8.3 percent income and 14.6 percent from capital appreciation.
Sources attributed the sizeable returns to increasing values for beef cattle and beef cattle pastoral lands, water and horticultural assets embedded in the index’s portfolio, but noted that the figure will likely smooth out over time.
But it still scrubs up well against the alternatives. For instance, the MSCI Australia Quarterly Unlisted Infrastructure Index shows yearly unlisted infrastructure returns of 10.9 percent.
It’s a jarring contrast, and one that deserves to be measured.
Thoughts on the new index? Email me at email@example.com