Specialist agricultural asset manager Growth Farms Australia has launched an innovative investment trust, the Australian Agricultural Lease Fund, that will buy agricultural land and lease it to primary producers.
Farm leasing is a well-established model in the US and other markets, and Growth Farms Australia believes it has strong potential in the local agricultural sector.
Growth Farms Australia’s managing director, David Sackett, says the advantage of the leasing model is that it gives farmers an opportunity to expand their businesses without having to find the capital to buy more land.
Sackett says: “Many existing farms are subscale and capital constrained. Leasing overcomes this.”
From an investor’s point of view, it provides a stable cash flow based on rental yield and avoids much of the volatility that comes with direct exposure to agricultural markets.
Sackett says investing in a farm leasing fund is similar to investing in a commercial property fund, where investors receive an income based on the rental yield and are exposed to the change in the capital value of the property, not the value of the business using the property.
The Australian Agricultural Lease Fund is open to wholesale investors, with a minimum investment of $100,000. It is a closed-end unit trust with a term of 10 years, although unitholders will have an opportunity to vote on continuing the fund or winding it up after five years.
The fund will acquire farmland and water rights, and lease them to third-party farming businesses. It will invest in higher rainfall regions, including North Queensland, Northern New South Wales, the Southern Murray Darling Basin, Victoria and Tasmania and South.
Growth Farms portfolio managers currently operate in all these regions and have experience in acquiring and leasing properties in the target regions.
Growth Farms was established in 1999 and currently invests in Australian agriculture on behalf of institutions, family offices and high net worth individuals. It has more than $440 million of funds under management.
Since 2008 it has produced a pre-tax internal rate of return of 10.4 per cent a year.
Growth Farms has forecast that the Australian Agricultural Lease Fund will produce an annual gross yield of 4.5 per cent. Lease terms will be struck on a three-year term initially, with extensions of three and four years. They will be indexed to CPI and adjusted to land valuations at rollover.
Capital returns in high rainfall areas have averaged around 6 per cent over the past 40 years. Growth farms estimates that agricultural land values will appreciate by CPI plus 2-3 per cent over the long term – driven by increases in agricultural commodity prices and productivity gains.
Sackett says one of the attractions of agricultural land is that it has low correlation to other assets. “Over the 20 years to 2016, Australian agriculture is negatively correlated to international equites and Australian fixed interest, and has a low correlation to Australian equities and Australian REITs,” he says.
The Fund has an ESG focus. Sackett says Growth Farms wants to leave each farm it acquires in better condition under its ownership.
“We will look at a range of environmental issues, including salinity, water quality and important vegetation ecosystems.
“And we want tenants who are engaged with their local communities. For example, we will be looking for farmers who are prepared to take on local people for work experience.”
The Fund will have a maximum size of $100 million and maximum leverage of 30 per cent. The target size for each farm will be $3-8 million, which Growth Farms says provides the best lease returns.