To lease or to operate?

Institutional investors may be increasingly attracted to funds touting operational agri expertise – but that doesn’t mean they should disregard buy-and-lease models, especially in developed markets like Australia.

Since we launched Agri Investor, I have had various conversations with managers and investors about the buy-and-lease investment models versus own-and-operate opportunities. While the former is a more traditional, real estate-type method of getting exposure to farmland and agriculture, the latter has prompted excitement from the investment community due to the inherent control over the asset that it entails and also the large returns on offer.

But buy-and-lease investments are still very relevant and can be exciting, particularly in developed markets such as Australia where there appears to be a boom in the land lease market. Whether you are an investment manager or an end investor, it is worth keeping abreast of developments here as several buying opportunities are likely to emerge with a vast pool of potential lessees available to manage land.

The buying opportunities are most likely going to come from the generational shift that is happening in the farming community. Whether this is a farmer planning his retirement and deciding to release capital from his land, or a young inheritor unable to afford to upgrade and improve his land, wishing instead to sell it and lease it back, land is up for sale.

Louisa Burwood-Taylor, Editor, Agri Investor
Louisa Burwood-Taylor, Editor, Agri Investor

Land aggregation is also increasingly important in Australia where farm operators are trying to feed growing demand for food from Asia and this is where the source of lessees is coming from; large farming corporations or families wanting to increase production.

Australia’s agriculture industry needs foreign investment to help this corporate farming industry develop and take advantage of that Asian demand and the buy-and-lease model sits well with locals who are largely maintaining their jobs on the land just perhaps under foreign ownership.

Matching the buyer to the seller and lessee will require some local knowledge and there are some local firms popping up to fill this gap such as National Land Lease. NLL will work with investors on direct investments but can also help investment fund managers find farm properties to lease.

Investment management firms are also providing a similar service such as the Australian Investment Development Corp (AIDC) that recently handled a direct $10 million buy-and-lease investment for a Swiss private investor into a cattle ranch in Queensland. AIDC is also planning to launch a fund that will mimic this style of transaction.

On the investor side, committing to buy-and-lease farmland funds – or indeed doing direct buy-and-lease deals themselves – is a relatively simple way of gaining agriculture exposure without needing operating expertise in-house, or through a local partner. It is also a popular tried-and-tested method among existing agricultural investors — not least TIAA-CREF, the US’s largest private pension fund and an agri-investment trailblazer that has both backed fund managers and dabbled with direct investment in the buy-and-lease sphere.

As Jose Minaya, the pension’s head of natural resources and infrastructure investments, tells us in this week’s Q&A, operating land, whether through a direct investment or fund commitment, makes risk factors such as labour costs, commodities prices and the weather far more pronounced.

Bearing these risk factors in mind and the availability of high quality farm operators to lease land in developed agri markets like Australia, buy-and-lease funds should be considered attractive and easy-to-understand investment prospect, particularly for first-time agri investors.

Australia is not the only market to watch. Canadian farmland values are hugely on the up and increased 22 percent on average in 2013 according to Farm Credit Canada. Investing a large amount of capital into operating land that itself has great upside potential seems unnecessary.

PS – What’s your view on this topic? Come along to next week’s networking drinks in Central London, where we’ll be discussing this and other hot-button industry issues.