Agricultural land is the quiet achiever of the Australian investment world, outperforming equities and housing over the longer term, according to analysis by Rural Bank.
In the 20 years to 2023, the national median price for farmland has risen by an average of 8.5 per cent a year. Impressively, this figure doesn’t include income generated by farms operations.
Australian farmland has outperformed the ASX200 and residential property over one year, five years, 10 years and 20 years, and has outperformed the US S&P 500 in all those timeframes except 10 years.
Agricultural land values aren’t correlated with more traditional asset classes such as equities, bonds and commercial and residential real estate and while the values of these assets bounce around, agricultural land continues to deliver reliable and steady returns.
The stable long-term returns from agricultural land are also in contrast to the volatile performance of the agricultural sector itself which is buffeted by drought, flood or commodity prices.
More investors are putting cash in farmland in the expectation that the solid returns will continue, based on limited supply of land and growing prosperity in Asia is creating more demand for food, in particular protein.
Investors who can get exposure to ESG-friendly cropping and horticultural farmland with access to water will be well-placed to benefit from this long-term trend.
Along with income generated from rental payments or farm operations, investors can also derive significant benefit from selling carbon credits generated on the farm, through storage of carbon in the soil, planting native trees and shrubs, or reducing methane from the cattle herd. Another recent income opportunity is hosting wind turbines or solar generation.
And unlike commercial and residential investment properties, farmland doesn’t attract land tax.
But agricultural land isn’t an easy sector for retail investors to get exposure to. Large agricultural assets are typically owned by wealthy farming families who have built up their holdings over generations, by institutions and pension funds, and by very wealthy individuals, such as Gina Rinehart, who is said to control 9.2 million hectares or 1.2 per cent of Australia’s entire landmass.
The best avenue for retail investors is via unlisted funds focused on farmland. Many of these funds tend to be quite opaque, and unlike equities funds, they don’t publish annual return data.
The top Australian agricultural property funds are currently producing total returns in the high single digits to low teens, made up of a dividend paid monthly and capital growth. Most will accommodate retail investors with $500,000 to contribute, although that differs from fund to fund.
The goFARM fund is a value-added agricultural fund which aims to improve farmland and operations to deliver higher total returns, which have been running at about 20 per cent in recent years.
The fund is chaired by Robert Costa of the Costa Group and describes itself as a high conviction investment manager, which prefers to make big bets on a limited number of key opportunities.
It is currently raising cash from high net worth and ultra-high net worth individuals to pursue more opportunities.
Retail friendly funds
Another option for retail investors to consider is the Argyle Group, which is focused on horticulture. It’s currently in the development stage, so there are no returns to speak of yet, but its highly capable team is targeting 10 per cent to 12 per cent total returns.
Kilter Rural has a range of farming and water funds, including the Kilter Water Fund, which owns a portfolio of southern Murray-Darling Basin water entitlements and is targeting net returns of between 9 per cent and 11 per cent, including a 4 per cent annual distribution. The fund is diversified across agricultural industries and geographies, and is positioned to benefit from strong and rising demand for water.
The Kilter Agriculture Fund has 7500ha of quality farmland and water in NSW. The fund is aiming for annual returns of 10 to 12 per cent from targeting good quality, arable land and water. It aims to build value and increase yields through improvements in soil, water, technology and biodiversity.
The Warakirri Farmland Fund buys, develops and holds a diversified portfolio of investment grade agricultural property and leases them to high quality agricultural businesses.
It is targeting assets including horticulture, viticulture, row crop farmland assets and water entitlements. Information on returns isn’t available, but it is run by astute and experienced managers.
Finally, AAM has a range of agricultural funds, including AAM Diversified Agriculture Fund, a $689 million mixed farming fund with holdings of 1,377,871ha in NT, NSW, Queensland and South Australia. It is targeting annual capital appreciation of 6 to 7 per cent and a yield of 4 to 5 per cent.