Why coronavirus is making ag sale-and-leaseback more appealing

Real estate investors looking for steady returns are beginning to view sale-and-leaseback agriculture assets as core investments, Colliers says.

For real asset investors more accustomed to the sale-and-leaseback models of the real estate world, which have suffered during the pandemic, several signs suggest they should be looking quite seriously at farmland.

Joe Azelby, head of real estate and private markets at UBS Asset Management, told Agri Investor in July: “Whenever you have a crisis, it is a reminder for people to diversify more than they have.

“People are going to scratch their heads and say: ‘Geez, maybe I have a little too much real estate. What else is out there, that, perhaps, is not going to behave in a similar way if there are more covids to deal with in the future?’”

A new analysis of the sale-and-leaseback model in Australian agriculture from Colliers International this week seemingly backs up Azelby’s thesis, suggesting that the current pandemic-induced uncertainty could trigger a shift in thinking among some real estate investors.

“There is a counter-cyclical opportunity to deploy a larger proportion of funds into leased agricultural assets compared to the more traditional forms of real estate investment like office, retail and hotels,” Colliers said in the September edition of its Colliers Radar update.

Leased agricultural assets have continued to perform well during the first half of 2020, the real estate agent said, which tallies with everything we’ve been hearing from investors about how resilient assets have proved to be so far, especially those with offtake agreements in place.

As a result, Colliers says: “Some real estate investors may consider to reclassify agricultural investments as core assets. This strategy is expected to reduce risk exposure without sacrificing returns over the long term and potentially underpin growth in Australian agriculture.”

We’ve already seen some evidence of this, with ASX-listed real estate investor Primewest moving into ag in a big way this year by acquiring goFARM Asset Management for A$10 million ($7.2 million; €6.1 million) and the Lamattina celery farm for A$42 million.

At the time of the Lamattina purchase, Primewest chief executive David Schwartz explicitly said the firm was pursuing a counter-cyclical approach to agricultural investing by building a portfolio of assets with strong tenants in place – pretty much exactly the strategy that Colliers is now saying should be increasingly attractive.

Sale-and-leaseback assets in agriculture are obviously still exposed to seasonal risks and other factors. As ex-AustOn Corporation chief executive David Goodfellow told the 2019 Agri Investor Forum, the chances of losing a tenant during a multi-year period of difficult seasons are “really quite high.” But for certain types of investors looking for steady returns during covid-19, they look set to become increasingly appealing.