IFA Online | 15 Dec 2011 | NB: This is commercial literature
Reap what you sow: Why there's money in farmland
Author: Tony Hales
Tony Hales, managing director of Stadia Trustees, puts forward the case for including farmland in your clients’ SIPPs [self-invested personal pensions, UK].
Farmland is an ‘alternative’ investment that has become increasingly attractive of late. However, despite its recent strong performance, to many investors it is a poorly understood asset class.
There are many reasons why a form of farmland should feature in portfolios, most notably, the dramatic rise in world food prices, coupled with the availability of land decreasing through urbanisation, leading to rising farmland values. With a growing world population, rising consumer culture in the east and search for clean energy sources, experts are predicting that this trend is set to continue.
During the recession, land has been stable and resilient compared to other markets, and its solid, long-term fundamental features represent a secure and lasting component of a well-designed portfolio.
What many investors like about farmland is that it is a physical asset and has historically been a proven hedge against inflation, while providing uncorrelated returns, making it an important element in a selection of diversified investments.
In the UK, outside of a pension scheme, investment returns should be subject to capital gains tax on any increase in capital value. This is not applied to investments inside a pension scheme, and for this reason farmland is often viewed attractively for UK SIPPs.
Farmland also has the advantage of generating an annual income through crop production, making it an even more appealing investment. The growing popularity of investing in farmland is shown through the increase in pension fund capital allocated to agriculture which has risen considerably over the last ten years.
Of course, like all investments, farmland has its own individual risks to consider, if investing in farmland abroad there are currency risks, market volatility concerns, political factors and potential climate uncertainty.
It is important that proper due diligence procedures are carried out with all farmland investments. The purpose of these studies is to provide investors with a detailed and comprehensive insight into potential investments.
At Stadia Trustees, we independently undertake strict due diligence tests on all unregulated investments on SIPPWISE, our investment directory offering a wide choice of investment products [www.sippwise.com]. One such case study is JPT Capital Agrifund in Australia, which Stadia visited at the beginning of Q4 2011. Using this example I will explain how a due diligence report in regards to farmland works.
The JPT Capital Agrifund offers retail and institutional investment in Australian wheat farming. Investment in the fund is used to acquire plots of land, recognised by the title of ownership and the Australian legal system. The aim of the fund is to invest across a portfolio of commercial agricultural holdings to diversify risk. The purpose of Stadia’s visit was to warrant that the investment is acceptable by the trustees of the Essential SIPP as a suitable investment for the scheme to invest in.
Although due diligence reports are not intended to give any indication or endorsement that an investment is suitable for a particular individual or guarantee potential investment returns, it can give some comfort that the investment is not a scam or a Ponzi scheme.
Due diligence visits to farmland investments tend to review geographical locations and the reasons specific plots have been chosen, who the farmland is managed by and the experience these teams hold, and the size of the investment and its estimated returns.
In the case of JPT Capital Agrifund, farms are sourced according to proximity to current farms, infrastructure requirements of all holdings, soil type, historic precipitation patterns, and local opportunities for leasing the farm. The type of property is also a deciding factor and the size of the holding, performance history, paddock obstacles, initial improvements requirements, availability of local workforce and the price of the farm are all taken into consideration.
Farmland owned by JPT Capital Agrifund is managed by Corporate Agriculture Australia Ltd (Corpag), one of Australia’s leading farm management companies, specialising in management consultancy, agronomy and grain marketing. At the time of the due diligence visit, Corpag was directly managing over 100,000 hectares of Australian farmland for livestock and grain production.
UK SIPP suitability
The current size of the JPT Capital Agrifund is approximately £19m, equating to 33,000 hectare, which is estimated to produce 1.75 ton of wheat per hectare.
From this particular due diligence visit Stadia Trustees suggested that JPT Capital Agrifund is an acceptable investment for a trustee of a UK SIPP to invest in when appropriate.
Due diligence reports, such as this, prove that there are many opportunities available in farmland, and provided correct procedures are followed, investing in farmland can be a welcome addition to a diversified portfolio. Ensuring investors have access to the full range of HMRC permitted investments, including UCIS, is crucial in order to allow investors to make the most of their SIPP investments.