CORPORATISATION of farmland and agribusiness assets can be a contentious topic.
While some often claim there's risk of family farmers being priced out of owning farmland or expanding, a report by Colliers International wrote that corporate investment in Australian agriculture is essential for the industry to grow.
Authored by research associate director Karina Sales and agribusiness valuation national director Nick Canna, the report titled 'The rise of agricultural sale and leaseback transactions in Australia' shows the appeal that agriculture has to investors compared to other corporate real estate sectors such as hotels, offices and retail.
"We believe agribusiness investments should be a resilient investment class over the short to medium-term compared to more traditional forms of real estate investment," Colliers stated in the report.
WAFarmers president Rhys Turton said consolidation of farmland had always been occurring, both with family operations and corporate entities.
"There are family farming operations that are almost bordering on the size of corporate scale anyway," Mr Turton said.
"The corporates have seen the opportunity to acquire large tracts of land at relatively low prices on a world scale and get an economy of scale and efficiency that goes with that.
"That creates competition when bigger, better parcels of land become available to buy, so it has probably propped up the price of broadacre farmland in WA and made it quite competitive."
The buy and leaseback model has generated more money within the industry and Mr Turton said it has also aided farmers seeking expansion, which could be especially difficult with land prices steadily rising in recent years.
"It gives local farms the opportunity to expand for a reasonable price when they don't have the huge capital outlay to purchase the farm, so they can get some scale into their operations without the massive upfront cost," he said.
"I think that model has worked quite well for many WA farmers."
The sale and leaseback model of agribusiness has gained traction in recent years in Australia, with Colliers reporting a peak in 2019 when nearly $1 billion of assets were sold.
It noted that agribusiness investment opportunities of late have been influenced by a long-standing period of low interest rates, the low Australian dollar (which is ideal for exporters), a clean green image and uncorrelated returns to other forms of investment (particularly during these uncertain times).
"This specific scenario ultimately creates optimal conditions for agribusinesses to take advantage of sale and leaseback opportunities, with competitive tension created for domestic and offshore investors," the report wrote.
Competition between interested buyers of higher value farmland has grown in the past decade, with several Australian Securities Exchange-listed real estate investment trusts (REITs), high net worth individuals and foreign and domestic institutional capital all vying for a piece of the pie.
Colliers estimated there are 43 food and agribusiness funds investing in all forms of agriculture compared to just two in 2009.
"This helps provide assets liquidity and support to vendors and lessees looking to undertake sale and leaseback transactions," it stated.
Historically Westchester Group has been one of the largest investors of leased land in WA and Australia, along with ASX-listed Rural Funds Management, Arrow Funds Management, Regional Management Services and ASX-listed companies Vitalharvest and Macquarie.
More recently investors such as Australian Agricultural Lease Fund (Growth Farms) and ASX-listed Charter Hall and Primewest, as well as Warakirri Asset Management which has ramped up its WA investments in the past few years, have all become key players in the Australian agribusiness scene through buy and leaseback assets.
There are also Australian and foreign superannuation funds in the mix which are looking to gain exposure.
"In 2020, tenants have never had a larger pool to choose from," the report said.
It wrote that agribusiness assets also appeal to investors for their positive environmental, social and governance impacts, which are often embedded in the investment mandates.
"This is another reason for agricultural property assets to transition from ancillary to core investment over the medium to long-term," Colliers stated.
Ag property assets are the most resilient
Agriculture's resilience during the unprecedented coronavirus pandemic has underpinned investor's confidence in the sector.
The report claimed that to date, leased agricultural assets have continued to perform well throughout 2020 and investors have seen an opportunity to deploy funds into leased agricultural assets compared to traditional forms of real estate.
"The FY20 reporting season for traditional REITs in some instances has produced a reduction in values," the report wrote.
"Over the same period, agricultural investments have proven to be more resilient, with values holding firm."
While Colliers said revenue streams for more traditional forms of property investments should recover once the economy normalises, the risk profile for these investments could increase, potentially resulting in a review of investment mandates.
However, investors with sale and leaseback models in agriculture are not immune to risk, with the main risks generally being seasonal conditions, natural disasters, commodity price fluctuations and market accessibility.
"Any prolonged retraction in asset values from office, retail and hotels over the medium-term will continue to shine a light on agribusiness sale and leasebacks," Colliers stated.
"Some real estate investors may consider reclassifying agricultural investments as core assets.
"This strategy is expected to reduce exposure without sacrificing returns over the long-term and potentially underpin growth in Australian agriculture.
"As the industry becomes more mainstream the pool of 'blue chip' tenants is likely to grow."
Property yields differ across classes
Colliers researched Australian acreage prime yields across different property classes from 2016 to June 2020.
It found that leased returns from agricultural real estate classes, with the exception of cropping and grazing which had yields as low as four per cent, were higher than CBD office, CBD retail and industrial property classes.
Historically agribusiness assets have had a higher risk profile as farmland has been less liquid than more traditional forms of property.
Also, the cost of capital has also been much higher for agricultural transactions compared to office, retail and industrial.
With cropping and grazing properties, land value growth has generally been higher than other agribusiness sectors, which has typically provided greater returns but lower capital appreciation.
Colliers reported that since 2016, industrial and agribusiness (horticulture/ infrastructure) real estate assets have consistently generated the highest yields, although their risk profile has reduced since the start of the pandemic as both sectors have shown strong demand.
Colliers does not anticipate softening on yields in 2020/21.
"Low interest rates, good climatic conditions, increase in food demand and the low Australian dollar strengthened the financial outlook of most agricultural sectors," it said.
"This is reflected by the financial results of ag-tenants."
In the past agricultural leases have usually seen lower rental growth compared to traditional property classes.
Agriculture property has also been less volatile and not experienced the peaks and troughs evident in other real estate sectors.
The report said agricultural rental growth was expected to remain at its historical average of about 2pc in the short to medium-term.
It also anticipated office and retail rental growth to contract across Australia as vacancy levels have been on the rise.
Investments on land intensive assets in principle provide the best return over the long-term, as land value growth forms an important part of the overall return.
Passive investments in agriculture, which are typically less intensive such as cropping and grazing, show a wider yield band compared to CBD office and CBD retail and industrial assets.
Ag investment outlook
Colliers believes the outlook for agricultural investments is positive.
Many sophisticated investors having reassessed the sector's risk and landlords have been wanting to attract tenants who are good operators and until they find a suitable is found, they operate the land themselves, thereby generating in the meantime from farming activities.
"We have the view that the sale and leaseback of agricultural assets will become more mainstream as existing investors expand and new investors look to incorporate agribusiness into their portfolios," Colliers stated.
"The pool of farm management companies is growing which is reassuring for capital sources with not agricultural experience."