Hamilton Lane: ‘We’re starting to see farmland returns normalize’

Managing director Brent Burnett says recent data suggest return expectations for US farmland are closer to the 6-8% range than the 10-12% suggested by long-term performance.

Income is playing a more sustainable role in driving farmland returns, data for the fourth quarter shows, suggesting a much-needed correction, according to a Hamilton Lane managing director.

Brent Burnett – who joined Hamilton Lane when it acquired consulting firm Real Asset Portfolio Management, in mid-2017 – told Agri Investor there have been periods when the National Committee of Real Estate Investment Fiduciaries’ US farmland index has reported appreciation-driven returns his firm did not feel were sustainable, and that suggested a “de-coupling” with income returns.

“That’s started to correct itself and the fourth quarter was a good indication of that,” Burnett said, highlighting that appreciation accounted for between a quarter and a third of overall US farmland returns during Q4, according to the NCREIF farmland index published last month.

“We’re starting to see returns in this sector normalize to what we think our long-term expectation should be,” Burnett added.

Overall, NCREIF reported that US farmland markets recorded 2.85 percent growth during the fourth quarter, with income accounting for 2.19 percent growth and appreciation responsible for the remaining 0.66 percent. For full-year 2018, the index showed 6.74 percent total growth, comprised of 4.47 percent income and 2.19 percent appreciation.

Because agriculture is a sector where it is particularly important to focus on future conditions as opposed to past returns, Burnett said, investors would be well-advised to keep return expectations for farmland in the 6 to 8 percent range, despite the fact that some of the seven managers contributing data to NCREIF have been able to achieve growth of between 10 and 12 percent when measured over the full life of the investments.

“If you invested with those groups 10 or 15 years ago, you’ve seen some of those returns realized over that longer time frame,” said Burnett. “If you’ve invested – even with those groups that are contributors to the index – over the past three years, because they are trying to deploy new capital in a much more expensive asset class, the returns you’ve experienced have generally been much lower than that.”

Burnett also highlighted that out-performance by the Pacific West and Pacific Northwest regions has been driven largely by permanent crop properties. Much of recent investment by institutional investors have been focused on regions capable of producing permanent crops such as walnuts, pistachios, grapes, apples and cherries.

Water has also played a key role, according to Burnett, in driving many investors historically active in California north into active markets in the Pacific Northwest.

“With some of the water challenges in California, they [investors] have come up to the Colombia basin plateau in Washington and found really good permanent crop land with priority water rights coming out of the Columbia or the Snake [Rivers]. They feel better about the long-term viability of those properties and are willing to pay premiums for them,” Burnett said.

Managers contributing data to NCREIF’s index include Westchester Group Investment Management, Hancock Agricultural Investing Group, Prudential Agricultural Investments, UBS Farmland Investors, Gladstone Land Corporation, US Agriculture and Cottonwood Ag Management. As of the end of December, the index reflected data for 900 farmland properties with a cumulative value of $10.2 billion.