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Timberland and Farmland Investing

The growing African opportunity

In recent years there has been a significant increase in institutional investor interest in farmland and forestry (or timberland) investment opportunities. While some larger pension funds, sovereign wealth funds, endowments, foundations and insurance companies have long held positions in these sectors, the number of interested asset owners has grown considerably over the last decade. In 2005 fewer than 20 farmland funds were operating globally. By 2017, that number increased to over 130 with estimated aggregated assets under management of US$32 billion.

But why the growing interest? Farmland and timberland investments are seen as stable, long-term and low-risk assets, providing above average ROI, portfolio diversification benefits and a hedge against inflation. According to the U.S. National Council of Real Estate Investment Fiduciaries, during the years 1993-2017, the country’s timberland and farmland sectors provided annualised total returns of 8.4% and 11.8% respectively.

In the last decade the race to “real assets” intensified following the global financial crisis. It’s therefore unsurprising that the farmland and timberland sectors have received much closer attention from investors.

Africa and Africa-focused investors are in an excellent position to benefit from this global surge in interest. It is widely recognised that the African farmland and timberland opportunity hasn’t yet reached its full potential. The continent still holds vast swathes of unproductive arable land which, with the right kind of management and planning, can rapidly increase productivity. The continent holds 60% of the world’s uncultivated arable land  and of that, only 8% is currently under managed water and land development.

In recent months, talk of lowering trade barriers to unlock the potential of intra-Africa trade has strengthened. With a population of 1.2 billion and fast-growing urban centres, the potential for significant ROI is real. Akinwumi Adesina, President of the African Development Bank, often speaks of how Africa’s future millionaires and billionaires will likely be farmers. He’s right. In addition, over 60% of the continent’s population are below the age of 25. Young people not only need jobs. They’re also technologically-savvy (technology is changing African agriculture) and with increasing purchasing power, form an important consumer class.

To make the most of the opportunity investors need to find the right way in. According to bfinance, the investment consultant, there are three main strategies: (i) leasing (ii) traditional (iii) private equity.


First, the leasing strategy involves buying land and leasing it to farmers. In some cases, these are cash leases delivering a fixed coupon every year. In other cases, the returns are aligned with the profits of the operating partner who leases the land. Second, the “traditional” strategy is about ownership/direct operation of the land, with involvement in various parts of the value chain depending on the investment. And third, the PE strategy involves taking stakes in companies which are involved in various parts of the agricultural value chain. Phatisa, the PE firm, is a good example of this. With its US$246m African Agricultural Fund (AAF), it’s investing in food and agri focused pan-African businesses. Its US$41.95m Pan-African Housing Fund is investing in affordable housing in East and Southern Africa. Timberland is a useful material in construction.

But what about going for a two-pronged strategy? A report by Manulife, the asset manager, explores what a combined timberland/farmland investment portfolio might look like. It provides a fascinating comparison of the risk/return profile of a combined portfolio to commercial real estate and other financial assets. The report’s authors argue that having a broader investment mandate across both sectors enhances an investor’s ability to act opportunistically.

It’s worth noting however that while farmland and timberland provide huge promise, ESG considerations need to be thought through seriously. Deforestation, crop disease, rule of law issues, etc are just some of the areas that investors should take particular note of.

The following research papers on timberland and farmland, curated by the Savvy Investor content team, explore in further detail a number of key issues: i) the characteristics of timberland and farmland as an alternative asset class, ii) whether these investments are suited to the current rising interest rate environment, iii) the history of investment in these areas and iv) how to gain investor exposure.

Timberland and Farmland: Working Together in a Mixed Asset Portfolio (Manulife, 2018)

For compliance reasons, this paper is only accessible in certain geographies

This article provides a comparison of the risk-return profile of a combined timberland/farmland investment to commercial real estate and financial assets. Further, the authors analyse the performance results over the past twenty-five years for pure timberland investments and pure farmland investments compared to a combined timberland/farmland model portfolio.

History of Institutional Farmland Investment (Global AgInvesting, 2017)

This paper examines the institutional farmland industry's in detail – back to its roots in the 1970s and earlier – and asks its “pioneers” to share the lessons they’ve learned that can be applied to today’s global farmland/agricultural investment landscape.

Sector in Brief: Agriculture and Timberland (bfinance, Nov 2017)

Agriculture and Timberland have received strong attention from institutional investors in 2017, as have other “niche” real assets. While Timberland is a relatively well established sector, the past three years have seen a distinctive new group of non-timber agriculture funds coming onto the scene. This research note tackles structures, fees, opportunity types and risks.

Interest Rates & Timberland Returns - What are the Risks? (Manulife, Jul 2018)

For compliance reasons, this paper is only accessible in certain geographies

Over the coming months, the strong fundamentals currently characterizing the U.S. economy should be sufficient to offset any potential negative impacts of rising interest rates on timberland markets. In the medium-term, timberland should be well positioned to weather a cyclical economic down-turn resulting from further increases in interest rates.

Farmland Sustainability Report 2018 (TIAA)

This report by TIAA sets out customized KPIs that track the firm's performance across crops and regions. 

Timberland Sustainability Report 2018 (TIAA)

This 17-page report uses the UN-backed Principles for Responsible Investment Farmland guidelines to create 16 key performance indicators (KPIs) specifically for timber.

Timberland Investor Survey: positive but tempered expectations (KPMG, 2018)

Timberland investment continues to be an attractive alternative investment strategy for many institutional investors. This KPMG survey provides insights into investor profiles, attitudes and certain underwriting criteria, as well as forward looking sentiment on timberland as a distinct investment class.

Trends in Allocations to Farmland Investing: A Global Perspective (HighQuest Group, 2017)

The evolution of agriculture as an asset class is reflected in shifts in allocations of institutional capital across the value chain. This paper by HighQuest explores this in more detail.

2018 Agtech Investment Review (Pitchbook/Finistere Ventures)

Finistere Ventures, an agtech-focused venture firm, has released its 2018 Agtech Investment Review, developed in collaboration with PitchBook. The review provides in-depth insight on global venture financing activity across agtech, sub-sector trends, regional variations and more, spotlighting agtech challenges and opportunities across Latin America.

Argentina's grains industry: Implications for Australia (AEGIC, 2018)

For compliance reasons, this paper is only accessible in certain geographies

This paper has been authored by researchers from the Australian Export Grains Innovation Centre. It provides insights (with Australia in mind) into the many changes underway in the Argentinian grains industry and its supply chains.

 

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