Farmland is alien territory for most investors, but making time to understand the complexities of the market can produce good long-term rewards, Nick Tapp, chairman of farmland investment company Craigmore Sustainables, tells Agrimoney
As a long-term hold, farmland takes a lot of beating. It can generate substantial returns and is a safe haven when times get tough.
In the US, a good barometer of returns from farmland investing and with one of the larger data sets over a long period, the market has delivered a constant 12% compound annual return since the 1960s, says Nick Tapp.
"You could take any decade in that period and that's the sort of return you'd expect – typically 8-9% capital growth and 3-4% cap rate."
In the UK, cap rates are much lower, around 1-2%, but capital gains have contributed a higher proportion of total return. Allowing for inflation, an acre of grade 3 arable land in England is worth about five times as much as it was in 1993.
"You will always get short-term blips – capital values can fall back and the cap rate will vary year-by- year, due to the size and volatility of agricultural commodity markets and their impact on the bottom line. But they typically revert to the mean over a 10- year period.
"There is no new land coming on stream. Some is unproductive and could be improved, but the amount is relatively small. Investors can expect values to continue to rise."
However, many investors steer clear of what is a very inflation-proof asset, says Mr Tapp. This is particularly true for those coming from an active trading environment, for whom buying and holding – for years or even decades – is a whole new approach.
"Most people have limited or no experience in this market, and no relationships – they have to develop these while they are researching an unfamiliar asset class, often without investing initially, which is not easy. It requires patience to build these networks."
To add to the uncertainty, most would-be investors also have a poor understanding of what makes a good and bad investment, he adds.
"Compared with other asset classes, the farmland market is remarkably complex.
"That's a proposition, which causes concern. Often their investment advisers know equally little, so it should be no surprise that their money ends up going elsewhere."
The market is heavily influenced by politics. "In most areas of the world, agriculture and ownership of land is politically sensitive," says Mr Tapp.
In countries such as China and Ukraine, land cannot be bought, and the sheer amount of red tape involved in many other countries can make purchases difficult and protracted, and exit even more challenging.
Land quality is hugely variable. All countries have good and bad farmland, influenced by soil type, topography, weather, and, key in many areas, water availability.
"These differences and risk factors can be very parochial – local knowledge is really important. You have to know where to look, what to buy, and, perhaps more importantly, what not to buy," he advises.
So where are the opportunities? Given the length of hold, most investors will want to minimise risk. Political instability must be avoided, says Mr Tapp.
"There is a strategy that says money should be invested in areas that are under-developed, where good land with good water can be bought cheaply to maximise returns.
"However, in many of these area the political landscape is unstable to say the least, and returns rarely deliver a premium for political risk over the long term.
"Most investors don't want political risk. They want to be in places where there is a good rule of law, where governments change without resorting to guns.
"They want to be comfortable there's every expectation of getting their money back."
Regions that operate without subsidies, notably Australia and New Zealand, are advantageous as they tend to be more commercially focused, he adds.
"New Zealand became a nation of sheep producers, rather than sheep keepers, when subsidies went.
"Sheep numbers halved but meat production remained the same. Farmers invested in the right genetics and the right management systems."
But good rule of law supersedes everything, he adds. "England, a few other parts of Europe, the US, Canada, Australia and New Zealand are worthy of serious consideration.
"Countries like Argentina have huge potential, but have faced substantial political interference. Others, Romania for example, are also exposed politically and carry the risk of corruption."
There are not many places in the world where freehold land is available and investors can be confident of entering and exiting at the right value, says Mr Tapp.
"It is not easy to enter this market, and not easy to understand. It requires patience, but those who are are prepared to put in the hard yards will end up with a long-term asset that will continue to surprise."
Nick Tapp will chair a roundtable discussion, Investing in farmland, in the morning session on the first day of the Agrimoney Investment Forum.