Drought's over: fund managers flock to rural property

Joining them, Macquarie’s Viridis Ag has bolstered its portfolio of broadacre cropping properties with acquisitions this year in Western Australia and South Australia, while ASX-listed Rural Funds Group has raised equity to acquire cattle stations and macadamia plantations.

The attraction: strong returns on long leases, the growing importance of food security and the ability for investors to diversify their portfolios away from equities and other more volatile asset classes.

“In our view, an increasing global demand for food, particularly in Asia, provides an opportunity for Australian agriculture to capitalise on its competitive advantages and future growth prospects,” says Steve Jarrott, portfolio manager of Warakirri’s new diversified agricultural fund.

The fund has raised $25 million from local wholesale investors including family offices, charities, advisory groups and superannuation funds, and acquired three horticultural assets leased back to salad leaf producer Dicky Bill, berry grower Costa Group and WA’s Moora Citrus.

The fund expects to deliver a long-term income return of 8 to 9 per cent a year at a time when interest rates are near zero.

“The pandemic has shone a greater spotlight on the ag industry, highlighting the fact that ag is a resilient, essential service/industry and a valuable, profitable asset class,” Mr Jarrott said.

For Moora Citrus, founded 15 years ago by several local families, its partnership with Warakirri will allow it to expand from its orchards at Moora in the WA wheatbelt region into new orchards (which it will co-tenant with Costa Group) and push into new overseas markets.

“In 2020, we reached one of our own internal milestones by exporting 150 containers of citrus to several overseas markets and see this continuing to grow year on year,” Moora Citrus director Alan Yildiz says.

Joining Warakirri, Primewest, best known as a manager of malls, offices and warehouses, made its first move into farmland this year.

It launched a $100 million unlisted agriculture fund to acquire a portfolio of investment-grade agricultural assets in “above average value sectors” such as agricultural infrastructure, water, fruit, nuts and vineyards.

Primewest also took over the listed Vitalharvest Freehold Trust, which owns $275 million of berry and citrus farms leased to Costa Group and became its biggest shareholder.

While the trust’s earnings have taken a hit from a series of poor harvests, Primewest believes well-managed assets will deliver strong returns over the long term.

“People are worried about COVID and its impact on office and retail property, and who will come back into these properties, but everyone has to eat,” Primewest managing director David Schwartz says.

While not participating in the business of farming or taking the agricultural risk, Primewest will provide the capital for its tenants to expand their landholdings and the opportunity to participate in export markets whether through grapes, citrus or avocados.

A capital raising is on the cards for the Vitalharvest Trust (due to be renamed the Primewest Agri-Chain Fund) with plans to diversify into other “intensive farming” horticultural assets such as avocados, almonds and tomatoes

“We are finding there is plenty of appetite for the right farms,” Mr Schwartz says. “Investors have been a little hesitant to take on the farming risk. But you can eliminate that risk with water rights or access to water. We invest in properties where that risk is reduced.”

Despite the challenges of changing weather patterns, prime, well-managed farmland has proven to be a remarkably reliable driver of both income and capital growth over long periods.

Evidence of that can be found in the Australian Farmland Index, which tracks the performance of 40 blue-chip farming properties worth a combined $979 million.

Since 2016, the index’s rolling annual return has never dipped below 10 per per cent, coming in at 12.8 per cent for the year to June, a period that includes the impact of the pandemic.

Even with forecasts from both the Department of Agriculture and specialist rural lender Rabobank for commodity prices to fall this year because of lower demand due to the pandemic, farmers will have much higher volumes to sell after the drought and increase their operating profits.

“These [operating profits] provide farmers with financial capacity to buy land, and a positive outlook for strong profits will actually encourage farmers and investors to buy,” Rabobank analyst Wes Lefroy says.

“On the supply side, a period of sustained profits will actually limit the number of people exiting farming and putting properties on the market.”

Among those not selling, but expanding, is South Australian sheep farmer George Millington, owner of the historic pastoral holding and merino stud Collinsville (which he bought from Rupert Murdoch’s nephew, Paddy Handbury, in 2014).

Last year, he bought Kadlunga, a 3940-hectare high-rainfall property with a historic 1850s homestead in the Clare Valley, taking the value of his portfolio to about $75 million.

Rather than partner with institutional capital – “fund managers come and go”, he says – Mr Millington has invested his own capital to create a vertically integrated business that is now at the size and scale to manage climatic risk.

After 12 years of investment in land, technology, genetics and livestock, Mr Millington says “now it’s time to start to put some runs on the board”.

“It’s hard to find an asset class that will outperform farmland in the next five years,” Mr Millington says.

“With returns being squeezed in commercial property, farmland is now viewed as long-term and safe investment.”

Mr Millington attributes the the sector’s resilience to both its scarcity – “they are not making any more farmland” – and the quality of its produce.

“Australia has a natural advantage with its reputation for clean, green and traceable products.”

While he retains business interests in Adelaide, through his majority ownership of logistics player APD parcel delivery (a business that has also boomed during COVID-19), Mr Millington and his wife Sophie have no regrets about leaving the city.

“My wife and I really enjoy the lifestyle and it’s been a fantastic environment for our children to grow up.

“I also value being in Australia and producing something that other people value and will buy, whether it’s wool for the garment market, red meat or our genetics which are sold around Australia.”

West Australian farmer and businessman John Nicoletti also sees farmland as one of the safest of any investments amid the COVID-19 uncertainty in other sectors.

Mr Nicoletti has sold two big farm land packages in the past five years, both to overseas interests, and since splashed out $30 million on a new string of farms across WA. He expects his investments to double in value every 15 years.

“If you are talking about secure investments right now, I don’t think there are too many things that can compare to rural properties,” he said.

“Our land is clean and green and we are selling the cheapest land in the world. We have also got neighbours very close by that are going to get hungry.

“I still think that in Australia farmland values have got a long way to go before they hit a ceiling.”

Mr Nicoletti typically looks at the land type and who has been farming it before making an acquisition. He then turns his attention to making the farm more profitable.

“I see a lot of upside in good quality agriculture land in Australia, especially if there is any water of substance around,” he said.

Many others see the upside too – in the year to September, rural specialist Elders sold more than a $1 billion worth of farmland for the fourth year in a row, despite the pandemic.

“In the farmland space, we are continuing to witness extreme levels of demand on the buy side during a period where listings are constrained,” said Tom Russo, general manager for real estate at Elders.