SALE and leaseback deals could become a bigger feature on the Australian agribusiness landscape with market conditions “perfect” for such investments, according to a new Colliers report.
The rural sector has been slower to adopt leaseback plans than other industries, said Colliers International national rural and agribusiness director, Tim Altschwager, but a lower dollar and interest rates could reverse this resistance.
With 99 per cent of the approximately 134,000 farm businesses in Australia family owned and operated, Mr Altschwager said emotional attachment to the land was definitely a consideration.
“By becoming both the lessee and the seller, the owner-occupier negotiates from a position of strength ”
“Farmers are reasonably private business people who enjoy the security and control of land ownership - they have not been prepared to manage landlords,” he said, noting that the younger generation of farmers were more open to alternative structures such as sale and leaseback.
But with the Reserve Bank cutting interest rates for the first time since August 2013 to a record low of 2.25 per cent and the Aussie dollar trading down 1.8 per cent to US76.60c on Tuesday afternoon, Colliers expects to see more sale and leaseback arrangements, particularly in post-farmgate infrastructure businesses.
While investors were typically attracted to high yielding opportunities in low risk sectors, Mr Altschwager said in an unstable global economic environment investors looking for “a safe haven” were increasingly embracing opportunities in Australian rural and agribusiness, which is traditionally seen as a low yielding investment with long-term consistent capital growth.
A spate of high profile agri leaseback deals has also stimulated investor interest, with McWilliams, Inghams and Olam completing transactions in the past year.
A sale and leaseback transaction typically entails the sale of rural assets, with the seller then leasing the property back on long-term lease of generally 10 to 15 years, allowing redeployment of capital back into the core business.
“By becoming both the lessee and the seller, the owner-occupier negotiates from a position of strength to ensure that they maintain uninterrupted control of the transaction; and perhaps, more importantly, they liberate capital to invest in their core business,” says the Colliers International and Grant Thornton paper, Sale and Leaseback – how it could benefit your business.
The sale and leaseback this month of three McWilliam family vineyards to Hong Kong-listed group CK Life Sciences for $15.7 million will see the McWilliam's Wines Group rent the vineyards for 15 years, with further options to renew the tenancy for five years.
The acquisition takes CK Life Sciences' Australian portfolio to 8700 hectares. CK also has majority ownership of Belvino Investments, which owns 4600ha of planted vineyards in Australia and 1100ha of vineyards in New Zealand.
“The steady returns of our rural and agribusiness industry are very attractive to offshore investors,” said Colliers International's rural and agribusiness valuations director Angus Barrington-Case.
“From a sale and leaseback perspective, the movement of the official cash rate and the Australian dollar are both important variables,” he said.
“Low interest rates help to encourage borrowers to use bank finance to invest in rural and agribusiness, while a stronger US dollar pushing the Australian dollar lower will help Australian rural and agribusiness products to remain competitive.”
WP Carey’s investment in Inghams Poultry and Adveq Real Assets’ purchase of Olam’s orchards are recent notable examples of domestic operators completing leaseback transactions with international investors.
Private investment group TPG raised more than $550 million from the November 2014 sale of Inghams Enterprises' extensive portfolio of chicken production facilities in Australia and New Zealand with a once-in-a-generation sale and leaseback agreement.
The Inghams portfolio, consisting of processing plants, feed mills, breeder farms and hatcheries, was split among several different buyers. Charter Hall bought six Inghams properties for its Core Logistics Partnership, Direct Industrial Fund and Core Plus Industrial Fund. All the properties were leased back to Inghams on initial terms of 20 and 25 years. Offshore groups also weighed into the leaseback campaign.
In a deal described as one of the biggest farmland transactions worldwide in the past year, Singaporean-based Olam International wrapped up a $211 million sale last February.
Olam Australia executive director Bob Dall'Aba said the land sale freed up cash for the company to expand its fast developing base in the cotton, grain, wool, dairy and nut sectors in Australia, or divert some funds to overseas projects.
Olam sold its vast 18,000ha Victorian almond orchards at Mildura and Robinvale to an international investor partnership led by Zurich-based asset management company Adveq Real Assets as part of a minimum 18-year leaseback deal, with an option to extend its lease well past the initial contract.
Adveq executive director Berry Polmann said agribusiness was an attractive long-term proposition for his investment group.
“Institutional investors are attracted to farmland investments for their diversification benefits and long-term inflation protection,” he said.
“Investors require sustainable performance in an asset class that might be challenging to access.”
A capital idea
Mr Altschwager said leaseback was a sensible option for capital-heavy farming operations such as cotton and rice. “Some primary production involves exceptionally high levels of infrastructure and ongoing high costs in order to produce each year,” he said.
“After a couple of low-yielding years, the cost of debt in order to get a crop in the ground can be crippling. In these circumstances, the opportunity to pay down debt and reduce interest costs can be beneficial.”
Mr Barrington-Case said Colliers anticipated infrastructure-intensive areas such as sugar mills, cotton gins, nut and horticultural processing, abattoirs and grain handling facilities would be “the next big opportunities” for agri sale and leaseback.