Working the Land

THE ASPIRATIONS OF HIGH NET WORTH INDIVIDUALS ARE DRIVING INVESTMENTS IN FARMLAND OVERSEAS, WRITES MICHAEL HOARE

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.