The low down on Agri investing

Date: 23 Jun 2011


As mud is the new gold, Citywealth decided to speak to some experts in the area of agri’ to get their take on this growing area of investment.

Amanda Tagg is a partner in the Agriculture and Estates Team and specialises in agricultural property law. “I have an emphasis on work for clients that hold agricultural land as an investment, whether directly or through funds.” says Tagg, who explains she has experience of most aspects of agricultural and property law. “It includes the acquisition, management and disposal of freehold and leasehold agricultural estates, agricultural tenancies, single farm payment, agri’-environmental schemes and diversification of rural land through commercial activities such as business and research parks, residential development schemes and energy projects.”

Tagg offers a brief overview on agri’ investing and its growth. “Food security in the light of a fast expanding global population and scarcity of natural resources and climate change are all right at the forefront of national and global concerns driving investment in agriculture.” she explains.

I ask Amanda about the ongoing news that hedge funds have started hoarding commodities and UHNW are buying storage barns. Tagg says of her clients “We’ve seen investment into farmland, either directly or through funds. Direct investment tends to produce better results for IHT and CGT purposes.”

Land and property have always been considered safe, long term investments and part of a balanced portfolio but with a ‘gold’ rush scenario there are usually losers. I ask what can go wrong? “Agricultural property as an investment raises particular challenges.” explains Tagg, “As with other types of real estate it is not particularly liquid and yields tend to be lower than those achievable in the commercial property sector. Potential land values can be affected massively by factors such as the availability of water, allocation for development, connections to the electricity and gas grids, mineral deposits and soil quality (amongst others). As a result, choosing the right investment can be trickier than in the commercial real estate sector. If land is directly owned then good management is a vital ingredient.”

As unusual funds have popped up everywhere, investing in fashion, wine and cars I ask about specific agri’ funds that may have arisen to serve the market. Tagg says “Funds which invest directly in farmland tend to be relatively rare due to the combination of relative illiquidity and the long term nature of the investment. We have however seen an increased interest from investors in adding farmland to their portfolios or increasing the proportion which they hold as against other real estate investments.”

With popularity comes price hikes and perhaps change of use for existing spaces like car parks into agri’ land. Does Tagg see any trends? She shares her thoughts. ” As a result of the increased interest from both institutional and private investors in farmland coupled with a limited supply of farmland to the market, prices for prime sites have reached unprecedented levels. We haven’t seen a trend in changing land use to agricultural to capitalise on land values because investors tend to value farms and estates which have potential for diversification and development in addition to agricultural production.”

Is investing in agri’ the new gold?

“Farmland, as a resource, may be set to become as valuable as gold in the future, but for now it is its potential – the possibility to work it harder in order to increase productivity and maximise yields – that sets it apart. As well as increasing food production there may be potential to diversify through ventures such as commercial lettings, renewable energy projects, quarrying and landfill and, if the land is in the right location, housing development. But even without this extra potential, farmland represents a stable and, on past performance, inflation proof, long term investment. And unlike gold, farmland produces a regular income.”

What key things would you advise UHNW clients looking to invest in this area?

“Historically, farmland has proved an extremely stable investment and with the combination of concerns over food security, scarcity of natural resources, lack of affordable housing and climate change, its future looks bright. However, it should usually be considered a long term investment and should be made with care and the correct advice. Investors need to consider carefully the nature of their investment. What level of direct involvement are they expecting? Will they let the land to a tenant farmer or enter into a share or contract farming arrangement? Are they interested in other projects such as renewable energy or water schemes whether on their own site or together with other landowners? Does the site have potential for development and is this something they would wish to pursue? If investing through a fund, investors need to satisfy themselves that they are happy with the fund’s management approach.”

What are the laws re investing in agri’?

“Investors need to be concerned about the same issues as they would be when buying any real estate – they need to ensure that they will get good title and all of the rights they need to use the land for its current and any proposed future use. The agricultural sector has been the subject of much legislative intervention over the years. In particular, if the land is to be farmed by a third party then it is critical to ensure that an appropriate arrangement is in place. Agricultural tenancies are notoriously inflexible and there are many traps for the unwary landlord.”

Have you heard any interesting stories about land and farming use? Citywealth recently heard about a UK person with a large, commercial farm in the Congo because the land is very fertile and easy to grow crops?

“In our experience many investments in exotic locations have come to grief because of the lack of a reliable legal framework, although some of the companies which invested in Poland and other Eastern European countries are beginning to do well. However there can be difficulties even closer to home. In France, for example, the purchase of farmland in itself does not always give you the right to farm it.”

Amanda Tagg is in the Cambridge office of Mills & Reeve

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