Institutional appetite for agri at ‘inflection point’

Park Madison Partners, a specialist in raising real estate capital, describes farmland as the 'least penetrated and underdeveloped' property sector, with potential productivity gains and attractive yield.

An attractive entry point into markets with “exceptionally strong” fundamentals means farmland will garner more interest from institutional investors in the years ahead, according to Park Madison Partners.

In its 2018 Outlook released Tuesday, the New York-headquartered real estate capital raising and advisory firm included a prediction that farmland investment will gain wider appeal among institutional investors in a list of 10 expectations for the year ahead. The report labels farmland as being among the “least penetrated and underdeveloped” of real asset sectors, highlighting that only about one percent of $2.7 trillion in US farmland is currently owned by institutions.

“Though farmland’s investment characteristics have been known to investors for several decades, there are several reasons why we believe the asset class is at a historical inflection point which will lead to greater institutional investment and professional management in the years ahead,” Park Madison wrote.

The report goes on to briefly summarize agricultural market fundamentals in terms of performance through economic downturns, limitations on future growth of farmland supply and connections to global population growth and middle-class expansion.

“Farmland productivity has been improving for decades thanks to widespread use of fertilizers and pesticides, better irrigation techniques, and engineering plant genetics to increase crop yields. But the incremental productivity gains from these strategies have largely been realized, and growth in crop yields is no longer outpacing population growth,” the report said. “This suggests future opportunities for capital providers to invest in technological upgrades and improve operations.”

Rise of the REIT?

In an email to Agri Investor, Park Madison principal John H Sweeney said that farmland will continue to compete with energy, infrastructure and other real asset sectors for commitments from investors looking to protect against inflation and limit correlation to other markets. On the public markets side, Sweeney noted that it is too early to know exactly what lessons relevant for farmland REITs might be drawn from the development of commercial real estate REITs.

“The nascence of farmland REITs is a good reminder that the farmland market is still highly fragmented and lacks institutional ownership, which suggests continued growth opportunities for farmland investment managers in the years ahead,” he wrote.

In addition to a number of commercial real estate-specific predictions, Park Madison forecasts elsewhere in the report that economic recovery in Europe will accelerate in 2018, the US Federal Reserve will continue to gradually raise interest rates and Republicans will sustain “significant losses” in US midterm elections.