The Australian government has made no mystery of the reasoning behind its recent toughening up of foreign investment screening in farmland.
Two weeks ago, announcing a requirement that all property potentially bringing a foreign investor’s Australian farmland holdings to more than A$15 million ($11.7 million; €9.6 million) be advertised for sale for a minimum of 30 days, it pledged to “ensure Australians will get every opportunity to purchase agricultural land.” By offering Aussie investors the opportunity to bid first, Canberra meant to attract more domestic capital to the sector by tilting the balance away from overseas buyers.
But Pat Lash, a REST Super franchise manager who wrote a report on the topic last year, doubts the new law will have its intended effect. What has held Australian supers so far, his research suggests, is not unfair competition from overseas but a handful of structural hurdles.
He suspects the new regulation may even be counter-productive. “Vendors would still seek out the highest prices and if foreign investors for any reason aren’t willing to wait the 30 days and turn their noses up at Australian opportunities then prices will correct,” he tells Agri Investor. “In turn, this might reduce the investment returns on current super fund allocations to ag, perpetuating the stigma of poor performance in the sector.”
Gatekeepers keep quiet
One reason why Australian supers are struggling with ag, he argues, lies in a persistent resourcing problem. Many investors from overseas use multinational asset consultants and advisory firms, he points out, which are more likely to employ ag specialists. Domestic asset consultants, in contrast, rarely have experts dedicated to the asset class.
That ties in with a staffing issue. “Those funds using asset consultants do so not only for their expertise and due diligence, but also as a safeguard in the event of negative performance,” Lash reckons.
“Whilst funds are building up teams to go direct in other asset classes, these are asset classes that they’ve had significant exposure to previously. They have been able to poach their internal teams from deep pools of talent within external fund providers.”
In his view, that explains why Australian supers have not tried to go direct in a way that others, notably Canadian pensions, have in recent years. “The super funds would likely only go down that route after seeing considerable sustained and repeatable success from an external fund provider.”
On the fence
Another problem lies in supers’ understanding of the asset class, which Lash says remains “much higher among foreign investors.” In seeking diversification, overseas LPs have not tried to shoehorn agri into an existing asset class, happy as they are to see it on a standalone basis.
Australian supers, in contrast, are still ambivalent about where it should sit. “If the returns are being driven mainly by increases in land value rather than operating income, does is sit within property? And if it is property, how could it compete return, fee and volatility-wise against commercial property?” asks Lash.
This argument was supported by interviews Lash carried out to substantiate his report. Several participants, which included super funds and managers, mentioned that “it was difficult to support a decision to invest in ag funds when commercial property was cheaper.”
Consultants he surveyed did argue that fees would likely come down as the asset class finds it feet. But interviewees also suggested that Australian supers, owing to legislative changes, had “a lower tolerance for fees” when compared with international peers. Outsourcing was mentioned has a potential remedy.
Another distinctive trait of super funds is the pressure the system is piling up on them, resulting in their reluctance to contemplate less mature illiquid strategies.
“With the productivity commission investigating default superannuation arrangements and members being able to switch funds easily between providers, the cash flow in superannuation is fiercely contested within certain sections,” Lash said.
The extra education required to bring ag investments to higher levels was a long-term affair, he argued. Supers may deploy more capital in the sector in due course, but “not as a cohort.”
“Those that have had positive experiences and are currently invested are more likely to explore higher allocations within their portfolios,” he concluded.
“Funds like Blue Sky are paving the way in that regard. However, those that aren’t invested still need further education or, dare I say, a significant market correction in the equities space to force their hand.”