38 | ALTERNATIVES Farmland WORDS | Daniel Kiernan
INVESTMENT
www.opp.org.uk | FEBRUARY 2011
Farms look good
IFAs and agents looking to broaden their offering of investment products should consider farmland. It’s a product with a great back-story that offers solid returns for investors and good commissions for agents. In this article Daniel Kiernan, chief investment analyst at Alternative Outlook, outlines the benefi ts and key selling points of moving into the countryside to fi nd an interesting new offering for your clients.
I
t sounds good, but what are the real benefi ts of farmland for property agents? As an investment
product, farmland offers three key benefi ts to agents: • A great back-story to help sell it; • Favourable commissions for agents; • Farmland is a strategic fi t with existing product offerings. The case for investing in farmland
is supported by a great back-story that can easily be substantiated in the press. I’ll expand on this back-story below, but for agents it’s a useful way of helping consumers to get a handle on farmland and the reasons to consider investing in it.
Commissions & strategic fi t Unlike gold, which we reviewed in the last issue of OPP, commissions on farmland compare very favourably with property investment products. Agents don’t need to consider farmland as just a “complimentary” product; it can be a core offering that forms a central plank in their business models. For agents
already selling property investments, farmland is a similar enough asset to avoid the perception amongst consumers that you’re just jumping on the latest bandwagon.
Key Selling points in the story Global Demand for Food: demand for farmland is supported by the growth of the world’s population. Currently the global population increases by 75 million each year and is forecast to reach 2.3 billion by 2050. That’s a lot of extra mouths to feed! This will require a 70% increase in global food production, yet the total amount of farmland in the world can only increase by small amounts and the amount of arable land per person on the planet has halved in the last 40 years. Furthermore, as living standards rise
in emerging economies demand for meat also rises: for example during the 1980’s each person in China ate 20kg of meat per year on average. By 2009 that had increased to 50kg of meat per year. This requires ever greater amounts of
land to provide animal feed as it takes 7kg of grain to produce 1kg of meat. With these kind of global pressures crop prices, and hence the price and the rents of farmland, will rise - perhaps very steeply. We’re already seen evidence of this. The price of staple crops has risen by more than 80 per cent since 2005, according to the World Bank. There
“The performance of the investment is based upon the demand for food, not the economy ”
were food riots in 15 countries during a period of soaring prices in 2008 and the UN is predicting that food prices could rise by as much as 20% in 2011. This is a compelling back-story
that stands up to scrutiny and holds true whatever happens next in the global economy.
Solid Investment
One of the principal benefi ts of alternative investments is that their performance is not correlated to the performance of more commonly held assets. This means they are useful tools to help diversify a portfolio and reduce risk and this is certainly one of the key characteristics of farmland.
The performance of the investment
is based upon the demand for food, not the strength of the economy and farmland is a strong hedge against high infl ation.
In these uncertain times an investment that can be an insurance against economic turbulence and volatility is an attractive proposition for many consumers.
Supply & Demand | The amount of arable land per person has halved in 40 years
Also, good product providers should be able to accurately forecast both their
Due diligence
As with any investment, it’s important to undertake thorough due diligence. Key issues to investigate include: • Ensuring that investors have title to the land – this provides the direct ownership of a tangible asset that gives the investment its security. • Ensuring that there is an independent investor’s agent in place to act on the investors behalf in the event of
production costs and their crop yields and therefore calculate exactly how much they can afford to pay back to investors. This means investments can be structured like a bond: with secure annual payments over a fi xed term. While these kinds of investments
aren’t particularly exciting, the low risk and predictable nature of them makes them appeal to conservative investors and are particularly suitable for inclusion within a SIPP (a Self Invested Personal Pension).
What to look out for
Location … Previously investments into farmland were the preserve of either high net worth individuals or institutional investors who had the resources to source, purchase, manage and sell-on large parcels of land. The biggest barrier preventing smaller investors from participating was the very high prices of land in developed countries. This situation is changing now. The biggest opportunities are now in South America, South East Asia and Sub- Saharan Africa, where the prices are 10 or 20 times cheaper than in the UK and the growing conditions are better. We are now starting to see high quality products with low entry levels that are suitable for smaller investors start to come to market.
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