Work­ing the Land


Hong Kong Tatler - - Working The Land -

Savvy in­vestors seek­ing a bet­ter re­turn on their dol­lar and re­tail­ers look­ing to se­cure their sup­ply chains are driv­ing for­eign in­vest­ment in in­come-earn­ing real es­tate. While big-ticket pur­chases of man­sions and apart­ments in global ci­ties may steal the head­lines, some of the smart money is head­ing to­wards in­comeearn­ing in­vest­ments in agri­cul­tural land. The in­vestors are in­creas­ingly main­land Chi­nese busi­nesses, ea­ger to cater to the mid­dle class there, a con­sumer want­ing to avoid the food scares and en­vi­ron­men­tal con­cerns that in­creas­ingly plague fam­ily life.

Chi­nese in­vestors are milk­ing a cash cow and the num­bers are ar­rest­ing. In one re­cent deal struck in Septem­ber, the Beijing Agri­cul­tural In­vest­ment Fund com­mit­ted to spend­ing A$3 bil­lion (US$2.6 bil­lion) on Aus­tralian dairy, beef, lamb and aqua­cul­ture as­sets, ac­cord­ing to a re­port in the Business Spec­ta­tor web­site.

Real As­set Man­age­ment chief ex­ec­u­tive Scott Wehl is in no doubt that in­vest­ing in Aus­tralian farm­land for crop­ping and grazing live­stock is a de­vel­op­ing trend among smaller in­vestors. “US$10M buys an aw­ful of lot of farm in Aus­tralia,” he says.

He of­fers the ex­am­ple of a pri­vate Chi­nese company that re­cently bought 205,000 hectares of land in Aus­tralia’s North­ern Ter­ri­tory for about A$12m (US$10.5M). The price was be­low the A$15 mil­lion (US$13M) thresh­old for the Aus­tralian gov­ern­ment’s For­eign In­vest­ment Re­view panel to in­ter­vene in the sale.

“I think that while there is still a lux­ury trend among Chi­nese in­vestors in gen­eral, there is more in­ter­est in look­ing at in­comeearn­ing in­vest­ments,” says Wehl. “Ev­ery­one knows that for­eign prod­ucts like beef and milk are worth more than their do­mes­tic equiv­a­lents, and it’s an ob­vi­ous trend we’re see­ing of small- and medium-sized en­ter­prises from China, go­ing out and ac­tu­ally se­cur­ing their sup­ply chains.”

Wehl is so con­vinced of the trend that he left his job in wealth man­age­ment at UBS after a 14-year ca­reer in London and Hong Kong to es­tab­lish Real As­set Man­age­ment. The firm bro­kers deals worth be­tween US$10 and US$40M. He grew up on the Dar­ling Downs in Queens­land, one of Aus­tralia’s most fer­tile and renowned pas­toral re­gions, and has a first­hand knowl­edge of the coun­try’s agri­cul­ture in­dus­try.

“I have seen Chi­nese groups that are in­vested in Aus­tralia with a sound strate­gic plan that have run the business into the ground. They have tended to un­der­es­ti­mate the high costs in­volved,” says Wehl.

He rec­om­mends in­vestors “don’t bite off more than they can chew” and part­ner with an Aus­tralian en­tity that un­der­stands the le­gal en­vi­ron­ment, the coun­try’s labour laws and oc­cu­pa­tional health and safety reg­u­la­tions, and strict en­vi­ron­men­tal laws, for ex­am­ple.

The re­turns for in­vestors can be sub­stan­tial. Although th­ese are long-term in­vest­ments aimed at cre­at­ing new prod­ucts to sell in main­land China, mar­gins of 30 per cent and more are common. An Aus­tralian farmer would be grate­ful to re­ceive a 10 per cent re­turn on their out­put, he says.

In­vest­ing in idle land on the edge of ur­ban ar­eas may ap­peal to in­vestors with a big­ger ap­petite for risk. Ni­cholas Jack­son is a se­nior con­sul­tant at In­ter­na­tional Fi­nan­cial Ser­vices, a spe­cial­ist fi­nan­cial ad­vi­sory ser­vice based in Cen­tral. Their clients tend to come from all walks of life, but skew to­wards Hong Kong’s ex­pa­tri­ate com­mu­nity.

He has helped sev­eral in­vestors pur­chase land in Canada and the US that is ripe for de­vel­op­ment, ei­ther res­i­den­tial or com­mer­cial. In the nine years he has bro­kered th­ese types of deals, one of the best re­turns he achieved was an an­nu­alised re­turn of about 12 per cent over the course of a nine-year in­vest­ment in Canada.

Although he rec­om­mends in­vestors take a longer view when in­vest­ing in land, one Us-based in­vest­ment net­ted an an­nual av­er­age re­turn of about 9.9 per cent over a two-year time pe­riod.

Any­one weigh­ing up land bank­ing must take note of the usual caveats of in­vest­ing, he says, in­clud­ing to be aware of ap­petite for risk, un­der­tak­ing due dili­gence and fully un­der­stand­ing the prod­uct be­fore putting pen to pa­per. There are also some risks spe­cific to pur­chas­ing land over­seas. For one, the time frames in­volved are far longer than for most tra­di­tional in­vest­ment ve­hi­cles. Also, tra­di­tional in­vest­ments are highly liq­uid, while land is not. And there is also a ju­ris­dic­tional risk: the po­ten­tial jeop­ardy that a for­eign gov­ern­ment may change laws to re­strict own­er­ship, for ex­am­ple, that would ren­der an in­vest­ment far less valu­able.

“Land will fun­da­men­tally in­crease in value over the long run but the re­ally sub­stan­tial in­creases come into play with re­zon­ing of the land. And that process takes time, and lawyers, en­gi­neers, and peo­ple lob­by­ing on your be­half. Once you get to the other end of that process, that is where the value is,” says Jack­son.

There is also a ques­tion of land own­er­ship. He rec­om­mends in­vestors stick to Western, de­vel­oped coun­tries

where there is le­gal re­course if land is ap­pro­pri­ated.

In­vestors in land-bank­ing schemes tend to be rel­a­tively savvy about their fi­nances, and prob­a­bly hold a bal­anced and ma­ture port­fo­lio, he says. In an en­vi­ron­ment of low in­ter­est rates and low re­turns, th­ese al­ter­na­tive in­vest­ments present an op­por­tu­nity to re­alise a good re­turn.

In­vest­ing in land is also fa­mil­iar to most Hong Kongers or main­land Chi­nese, says Bran­don Hui, chief ex­ec­u­tive of Grov­e­land Fi­nan­cial Ser­vices. “Most in­vestors will be aware of the ben­e­fits of hold­ing prop­erty in their port­fo­lio and own­ing land in strate­gic growth cor­ri­dors might be seen as an ex­ten­sion,” says Hui.

For the cau­tious in­vestor, there is also the se­cu­rity of own­ing a tan­gi­ble as­set that will re­tain some value, no mat­ter how strong the eco­nomic head­wind is. Hui says that is es­pe­cially ap­peal­ing to in­vestors with less ap­petite for risk or with smaller amounts of money. Th­ese “mum and dad in­vestors” were also more likely to ben­e­fit from en­gag­ing a bro­ker to seek out the most suit­able deal. While there are a num­ber of de­vel­op­ers in North Amer­ica and Bri­tain that are en­gaged in land bank­ing and can be con­tacted di­rectly, a bro­ker as­sures at least some ob­jec­tiv­ity in en­sur­ing the best value for money. The wealthy and the time poor are also likely to ben­e­fit from a bro­ker’s ad­vice.

And it is largely in­de­pen­dent bro­kers and in­vest­ment ad­vis­ers that are en­gaged in th­ese types of deals. The big­ger multi­na­tional banks tend to clas­sify th­ese types of deals as too fid­dly and with­out the big­ger mar­gins they strive for, says Wehl.

One bank that does see the value in agribusi­ness is BNP Paribas. Since 1970, the bank’s fully owned sub­sidiary Agrifrance has helped man­age pri­vate in­vest­ments in farm­land, vine­yards, forests and hol­i­day homes. The bank’s bro­kers work with other pro­fes­sion­als to of­fer a “tai­lored” ap­proach to in­vest­ing in real es­tate out­side Hong Kong.

Stephanie Lair, man­ag­ing di­rec­tor and head of in­vest­ment ser­vices, Asia Pa­cific for BNP Paribas Wealth Man­age­ment, says the bank has spe­cial­ists in its Paris of­fice work­ing to as­sess vine­yards and other ru­ral as­sets – in­clud­ing chateaus. A fine art ad­vi­sory ser­vice is also avail­able to wealth man­age­ment clients.

Lair cau­tions that while there have been ob­vi­ous price gains and hand­some prof­its for many in­vestors in as­sets such as art and wine, some­times known as pas­sion in­vest­ments, th­ese mar­kets are illiq­uid and lack trans­parency. “Pas­sion in­vest­ments are, in fact, best pur­sued by those who do have a se­ri­ous knowl­edge and pas­sion for th­ese as­sets,” she says.

Dream winer­ies

Per­haps the most se­duc­tive of agribusi­ness in­vest­ments are vine­yards. In Cham­pagne a typ­i­cal in­vest­ment will set back the bud­ding viti­cul­tur­al­ist about ¤1.2m (US$1.5M) for a hectare of vines, ac­cord­ing to this year’s Agrifrance trend re­port. A block of vines in the small­est and ar­guably most cher­ished of Bordeaux wine grow­ing ar­eas, Pomerol, is priced at ¤2.4m (US$3.1M) a hectare. The av­er­age land hold­ings here are small by North Amer­i­can or Aus­tralian stan­dards at about two hectares.

How­ever, un­pre­dictable weather con­di­tions and picky wine drinkers can im­pact mar­gins. The 2013 har­vest in the Bordeaux re­gion, for ex­am­ple, was one of the worst in two decades. Vi­gnerons were tak­ing ¤1,239 (US$1,585) for a 900litre cask in Jan­uary this year, up from ¤995 (US$1,273) one year ear­lier, which might have been good news, if chateaus were hold­ing stock from past vin­tages and if de­mand from main­land con­sumers hadn’t col­lapsed.

Each of th­ese va­garies adds ad­di­tional risk. “Due to its long term na­ture, the value of any in­vest­ment can go down as well as up de­pend­ing on mar­ket cy­cles,” Lair says. “In mit­i­ga­tion, re­search has shown that man­agers with long track records have a strong ten­dency to re­peat their in­vest­ment per­for­mance.”

Buy­ing tracts of land with an eye to­wards de­vel­op­ment or for agribusi­ness is not for the feint of heart. Spec­u­la­tion is go­ing to drive the most lu­cra­tive re­turns, and there’s hard work ahead if you’re plan­ning on play­ing farmer. Plan wisely, know your lim­its, and have an exit strat­egy.

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