Farmland suddenly attractive to investors, says Callan
Low equity returns, inflation unease and global demand for food drive up interest
SAN FRANCISCO--(Investing in Farmland—Looking to Buy the Farm,” Jamie Shen, senior vice president and head of Callan’s Real Assets and Alternative Investments consulting groups, reveals that farmland investing has reached an unprecedented level of interest among institutional investors looking for higher returns on their investments.
Though farmland investing has been around for more than 20 years and Callan has covered the asset class for more than 12 years, it was only within the last 2 years that Shen saw an explosion in client interest. In an interview with Callan senior vice president, Bill Howard, Shen says it’s what hasn’t changed with farmland that makes it suddenly attractive.
“Back in the 1990s and 2000s, when stocks were earning double-digit returns, a farmland investment return of 7% to 9%, including income, didn’t generate much interest,” says Shen. “Now, with investors looking at a bond market where the prospective yields are very low, an estimated 7% to 9% return over the next 5 to 10 years is suddenly more appealing.”
Interest in farmland is also up because the asset class is no longer considered a standalone investment or part of a real estate allocation—which usually required a meaningful portfolio allocation of approximately 5%. Now that farmland has been re-categorized to the real assets category (which includes timber, infrastructure, private energy, real estate, commodities and TIPS), a 1% allocation to farmland is considered notable.
“Farmland returns have been remarkable and we haven’t seen a correction in farmland values like we did in real estate,” notes Shen. “The NCREIF Farmland Index returned 15.4% annually over the last 10 years, and nearly half of that figure came from income. Each of these calendar years produced positive total returns and that is what makes this asset class investment fairly unique.”
Callan’s research concluded that simple supply and demand also contributes to the increased attention to farmland. The global population, which is expected to grow from 7 billion to 9 billion over the next 40 years, is likely to heighten demand for agricultural land and the goods it produces. Another factor is diet. People worldwide are improving their diets and farmers may find it increasingly difficult to produce enough food to outpace rising demand. Research indicates that the US often fills that unmet demand and US farmland provides a way to take advantage of global and emerging market growth without having to invest in those markets.
In addition to being a good portfolio diversifier, farmland is an effective inflation hedge. “Whenever an extended inflationary period becomes a real possibility, investors look for alternative assets that have a demonstrated record of growing in price faster than inflation rises,” says Shen. “Typically hard assets are considered strong inflation hedges, and farmland is no exception.”
Callan found that the greatest obstacle to institutional investment in farmland is actually getting invested. Farmers are reluctant to sell their land, and very often when they do, it is as a result of a generational change.
“With more than $2 billion in investor capital on the sidelines and ready to be invested, if a $200 million farmland portfolio came on the market today, it would likely trade very, very quickly,” said Shen.
However, Shen cautioned that investors still need to be patient and committed to this asset class. “Farmland has many implementation challenges, it’s an illiquid asset class and it takes a long time to become invested. And though this investment has held a steady return track record, farmland probably won’t always generate a 15% return.”
About Callan Associates:
Founded in 1973, Callan Associates is one of the largest independently-owned investment consulting firms in the country. Headquartered in San Francisco, Calif., the firm provides research, education, decision support and advice to a broad array of institutional investors through four distinct lines of business: Fund Sponsor Consulting, Independent Adviser Group, Institutional Consulting Group, and the Trust Advisory Group. Callan employs more than 170 people and maintains four regional offices located in Denver, Chicago, Atlanta and Summit, NJ. For more information, visit www.callan.com