Thematic Research: Taking a look at the total return opportunity in agricultural farmland

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There is a total return opportunity that many savvy investors are missing out on

It may surprise, but agricultural farmland may offer a better risk-return matrix then many ‘risk’-less or ‘low risk’ investment themes. Why? Farmland is a silent income producer (land appreciation), not demanding much if one chooses a low maintenance investment strategy, but generates excess income during times of proper management.

Farmland Valuation

Australian farmland values are still relatively cheap. At present, Australian farmland trades at around $3,000/ha whereas European, North American and New Zealand’s farmland trade at around $30,000 – $35,000/ha.

South-East Asian Middle class growing by 515% by 2030

Today, 535m people are counted as middle class in the developing countries of South-East Asia. It is expected that by 2030, another 2.7bn in the region will form part of that middle class. This is in contrast to the EU and North America where the number of people are expected to remain at the same level, if not shrink.

China has proposed a ’One Belt, One Road plan’

China in particular needs to feed its growing and increasingly demanding population. Whilst New Zealand’s farmland already trades at European and North American levels, Australia is still relatively cheap and thus gives China an opportunity to buy into an organized farming culture.

The Australian Government expects a capital shortfall in the sector of $110bn by 2025

The Australian Government expects the domestic agricultural sector to see a capital investment shortfall of AUD$110bn by 2025. This is material amount and does not include the amounts required for the various sub-sectors, such as Beef, Dairy and Grains, which require an extra investment of AUD$9.7bn, AUD$12.6bn and AUD$9.9bn respectively.

Outlook

As an investment theme, we are surprised that not many investors have focused on this apparent ‘low-hanging’ fruit. It further surprises us, that Australia’s Superannuation funds are content receiving dividend income from their ASX listed holdings rather than take advantage of the value proposition their local land offers. Contrast this with the approach many foreign institutional investors have taken, the market may experience a mean-reversion before long.