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Climate change and land depletion driving returns from farms

Monday, December 09, 2013
Opalesque Industry Update - Climate change and depletion of agricultural land are the most important factors driving investment returns from farmland, according to new research by Aquila Capital (“Aquila”), one of Europe’s leading independent alternative asset managers.

In the survey, both climate change and depletion of agricultural land leading to scarcity of supply were ranked equal first in terms of driving positive returns from farmland. In third and fourth place respondents ranked demand for food from increasingly wealthy people and from the global population respectively.

Detlef Schoen, Group Head of Farm Investments at Aquila Capital, commented: “There are powerful macro trends supporting farmland as an investment: every day, 30,000 hectares of farmland are lost as a net 200,000 is added to the world’s population.”

When asked to identify future farmland investment opportunities 70% of investors cited backing companies that provide farm supplies while half (50%) believed that owning and developing farms will provide strong returns. The same percentage (50%) felt that opportunities lie in investing in infrastructure firms building transport links to farms.

Investing in farmland is still a nascent asset class, representing an average of only 1.3% of investor portfolios: however 23% say they are looking to raise their exposure to farmland over the next one to two years and only 2.3% plan to reduce it. When asked how more capital can be attracted to the asset class, 70% of investors believed the investment industry needs to develop more effective ways to invest in farmland. Half (50%) also say institutions’ own lack of understanding of the farming sector is stopping them from investing more in farmland.

However, several large institutions now invest in farms, including sovereign wealth funds such as Temasek and the China Investment Corporation.

Detlef Schoen added “Going forwards, we believe the best opportunities lie in using a conservative, yield-driven strategy, pinpointing the best farmers and working with them to align their interests with those of investors to maximize success.”

Aquila Capital’s specialist investment fund, which focuses on milk farms in Australia, is currently projecting pre-tax cash returns of 4-6% per annum as part of a double digit overall internal rate of return.

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