Direct Solo Investment? Collaborative Syndicate Investment? or Tradable Equity Investment? A Closer Look at the Considerations, Strengths and Weaknesses of the Potential Vehicles for Agriculture Investments.
We continue this series on agricultural investments with a look at the options for the mechanism by which an investment in farmland may be made. The assumption is that our profile investor – with £10,000 to £100,000 in clear, uncommitted funds available – has made the decision to invest in agricultural land, though not to become a farmer. Rather, the investment is to be in land which is being or will be farmed by someone else. (Elsewhere in the series we look at investment in ‘bare’ land.)
A further assumption needs to be made. That is, that the investor doesn’t intend to relocate in order for the investment to be made and managed. In this sense also, the projected investment is ‘passive’. Of course, there may be the desire to visit the investment property from time to time, indeed – if problems arise – there may be the need to do so. But it’s assumed that otherwise the investor will rely on third parties to carry on the farming operation.
Essentially, there are three mechanisms for an investment in farmland. The first is a direct, solo purchase of the land. The second is also a direct purchase but in collaboration with other investors – what we will call ‘syndication’ though ‘collective investment scheme’ is common parlance. And third, there is indirect investment, by means of the purchase of an equity interest – typically shares – in an entity which is in turn purchasing farmland.
A caveat should be inserted at this point. The commentary which follows is not intended to be and should in no way be relied on as legal or financial advice. Wherever farmland is purchased, and whether or not in the investor’s home country, there will be a legal regime – statutes and subordinate regulations – which regulate the transaction and which give it legal effect. Those domestic laws are of course absolutely paramount and expert advice on their operation should be obtained before a purchase commitment is made. The mandate of this piece is only to illustrate the various avenues which a private investor must explore when looking into the possibility of an investment in agricultural land.
Going It Alone
The attractions of going it alone in purchasing farmland all relate to the level of control which the investor has over the purchase process and subsequent management of the investment. Leaving aside the role of advisors – lawyers, accountants and valuers, primarily – the investor is in complete control and not reliant on the views or actions of third parties. There is no need for consensus or even consultation with other interested parties when negotiating the purchase price and other terms of the investment, such as the terms on which the land will continue to be farmed.
Of course, investors who choose to go it alone must have the confidence that they know what they doing and – crucially – that they will recognise when it’s time to seek advice or assistance. Negotiating for the purchase of land can be a difficult and protracted process and it’s not everyone’s cup of tea.
And there’s another thing – our investor profile may not have the financial muscle needed to take the direct route to farmland purchase. Even at the top end of our range – £100,000 – the present-day value of farmland in many countries is such that we have insufficient for a solo investment. If we take the United Kingdom as a case in point, the demand for farmland over recent years has been such that there is little prospect of finding quality land for sale at under £5,000 per acre (and this would be just for the land, with no additional assets such as a farmhouse). Leaving aside transaction costs, our £100,000 would get us no more than 20 acres, not enough land by itself to form a viable farming operation of any consequence. Such a plot might well be attractive as an accretion to an existing farm, either neighbouring or in the vicinity, but it will be rare for such land to come onto the market in the first instance, with most such aggregations arising from word of mouth.
The same general sentiment can be expressed for farmland of any quality in most other developed countries. The Knight Frank Wealth Report 2011 contains a useful table in the agricultural investment section, of indicative farmland prices in a range of countries. Up there with UK values, for example, is dairying land in New Zealand at US$23,000 (£14,150) per hectare (£5,900 per acre).
As that Knight Frank table indicates, there are huge differences in farmland prices as between different countries and even within the one country. In Brazil, prime land for sugar cane production close to Sao Paulo is put at $13,000 per hectare whereas $300 will, reputedly, buy a hectare of native bush suitable for cattle grazing in the remote Para province. Generally speaking though, the farmland investor with up to £100,000 to invest in the purchase of sufficient land to support a viable farming operation will have to look at parts of the world where, for differing reasons, values remain low compared to the UK. This invariably will mean the former communist countries of central and eastern Europe and countries in Africa, Asia and South America. With the exception of the first of those regions – and even then, limited to the countries which have since joined the European Union (and thus signed up for the EU’s legal rules – the aquis communitaire) – a solo farmland investment is going to involve our profile investor in a high level of risk relative to investing at home.
A final observation should be made concerning solo investment. Many countries, in the regions just identified as having farmland at values which will allow a viable farm to be established, have restrictions or even prohibitions on foreigners buying farmland. Typically, this obstacle is circumvented by the expedient of forming a company in the country in question, with the company then making the purchase. But it needs to be understood that, even if this tactic is effective, it adds a significant layer of bureaucracy and complexity to the transaction and may have downstream implications, eg for taxation or capital repatriation, which might not be immediately apparent when the transaction is entered into and must be understood.
Teaming Up – Syndication
An alternative to going it alone is to team up with other like-minded investors, with the funds of each pooled to provide an amount sufficient to purchase the land for a viable farming operation. Typically, this process is known as ‘syndication’. A farmland syndicate may be formed by a small group of investors already known to one another – perhaps they are friends or business acquaintances – or by the participation of a group of investors in a syndicate formed and promoted by a third party. This latter category will typically contain a larger number of investors than the former, comprising people who were probably unknown to one another before their participation in the venture.
The former category – a syndicate formed by a small group of existing acquaintances – should in principle carry the advantage that each investor knows what they’re getting into and who they’re doing it with. Typically, each of the investors will have participated, at least to some extent, in the setting up of the venture, identification of the farmland, familiarisation with the local legal, fiscal and taxation regimes, negotiation of the purchase, future management of the syndicate and of course of the farming operation, and so on. Each investor is thus likely to commit in an informed way and the group is likely to remain of one mind going forward. Generally speaking, that degree of intimacy will not be mirrored in a farmland syndicate marketed to strangers by a third party promoter.
The term ‘syndicate’ has no special legal meaning – it’s simply a way of indicating the relatively intimate nature of a collaborative investment or business activity, with the term also conveying the notion that each participant owns a share of the total investment, pro rata to the amount of capital contributed. In many, especially developed, countries, the legal vehicle for a farmland investment syndicate will be what is commonly called a ‘limited liability partnership’, formed and registered under dedicated legislation in that country. Thus, there is the Limited Liability Partnerships Act 2000 of the UK, the more recent New Zealand version of 2007 and, in the United States where such matters are legislated by individual states rather than at the federal level, many states make use of the limited liability partnership provisions of the Uniform Partnership Code.
Whilst the techniques and terminology differ from one country to the next, typically a limited liability partnership is a recognised ‘legal person’, consisting of a ‘general’ partner – invariably a company – appointed to manage the venture and a number of ‘limited’ (sometimes called ‘special’) partners who are the investors. Limited liability partnerships – often identified by the letters ‘LLP’ after their names – are so-called because unlike with an ordinary partnership the liability of each of the investors is limited to the amount of capital provided or promised. In this respect, LLPs are like companies, with protection from exposure to fiscal claims beyond the amount of the investment making the LLP a very attractive vehicle from an investor viewpoint. But LLPs differ from companies in that, for tax and other purposes, the investors are treated as direct owners of the partnership’s assets.
Where a farmland syndicate is formed by a promoter seeking investors at the outset or for inclusion once the venture has been established, there may or may not be an ‘offer of securities to the public’, or the triggering of a similar legal test in legislation designed to protect members of the public from being enticed into dubious investment products. If such legislation applies, the promoter will invariably be obliged to issue a prospectus – a detailed statement of the investment proposal, make certain minimum levels of disclosure and perhaps set up an independent trustee who can step in on behalf of investors if things go wrong. Note though that while such legislation differs from country to country, investments in land are often excluded – as in the UK, for example – or the legislation may not offer protection to ‘high net worth individuals’ or to ‘sophisticated investors’, being people who are thought able to look after themselves. In the UK, this type of syndicate or “Unregulated Collective Investment Scheme’, does not fall under the jurisdiction of the FSA and investors must due their due diligence on the background and experience of the third party promoter fully aware of this.
A final observation on farmland investment syndication is that whichever route is taken there will be a need for someone to be responsible for ongoing management of the investment, which typically will include oversight of the farming operation on the land. This manager will need to be remunerated and indeed, with promoted syndicates, it is the ongoing management fees which often provides the financial rationale for the syndicate’s formation. It goes without saying that the expertise and competence brought to this venture management role will be critical to its success going forward.
The foregoing discussion on farmland investment syndicates should clearly indicate the prospective investor’s need for competent advice before committing to the venture. Once committed, the investor may find that decisions are made – by a majority or by the ‘general partner’ – which that investor doesn’t agree with but becomes bound by, and that there is no swift exit mechanism in such event.
Indirect Investment – Farmland Investment Companies or ‘REITs’
This last point – that a farmland investment made in collaboration with a small group of other people will see the investor locked into the investment – is a reason why some investors prefer the more liquid mechanism afforded by so-called ‘REITs’ – ‘real estate investment trusts’ formed to invest in land generally or in specific types of land, such as farmland. Again, such vehicles are typically established under dedicated legislation in a given country but they are essentially companies whose shares are offered to all-comers and traded on some form of stock exchange.
A good example of this investment vehicle is Rural Equities Ltd, a New Zealand company which invests in rural properties , with some 29 farming operations currently in its portfolio, ranging across the main agri-sectors in New Zealand – dairying, sheep and cattle raising, arable crops and forestry. Rural Equities Ltd is not a ‘listed public company’, meaning that its shares are not listed on the New Zealand Stock Exchange, but an investment is possible by means of a purchase of shares offered on unlisted.co.nz. This is a purely internet-based ‘trading facility’, providing an alternative to either a full stock market listing – with all the compliance obligations such listing entails – or the sale and purchase of shares ‘OTC’ – over-the-counter. Would-be investors in this particular farmland investment product can see for themselves the trading activity of Rural Equities shares at the ‘quotesheet’ section of the unlisted.co.nz website. Activity seems on average to be every three or four days, with the share price trading in a narrow range. In short, a degree of liquidity appears to be afforded should an investor need to withdraw for some reason.
To this point at least, amongst the developed countries New Zealand appears to be blazing the trail for such liquidity options in farmland investment. There is no equivalent offering in the UK, for example, with the ongoing financial and economic crisis having seemingly killed off such initiatives. Case in point, the Braemar UK Agricultural Fund, based in Guernsey and launched in 2008 as an ‘unregulated collective investment scheme’ focused on UK farmland, subsequently abandoned its plan to list on AIM, the London Stock Exchange’s mechanism for floating and trading in shares of start-ups not yet ready for or wanting LSE listing. Though the fund’s shares are nominally listed on the Channel Islands Stock Exchange, the only practical means for investors to liquidate their investment remains the cumbersome – and uncertain – redemption mechanism.
An example of a more liquid indirect investment in farmland is provided by Bulgaria’s Advance Terrafund, a REIT whose shares are listed on the Sofia Stock Exchange. During the country’s property ‘bubble’, which started in the early 2000s and which burst with the onset of the global financial crisis in 2008, a number of such ventures were launched, seeking funds for investment in real property of all types. Most have fallen by the wayside, the latest being the ELARG agricultural land fund which in February resolved to voluntarily wind up during the current year (2012), six years ahead of schedule. The reason stated was that the share price did not reflect the underlying value of the assets held due to a weak equities market and the fund expects to realise a substantial profit on the sale of its assets. Advance Terrafund however seems set to soldier on, with its investment focus exclusively on the acquisition of agricultural land and enhancement of its value through consolidation and optimal management of the farming operations. As at the time of writing (end of April, 2012), Advanced Terrafund’s shares were, at 1.76 leva (approximately 80 pence), trading at a 12-month high, with its stock amongst the most actively traded on the Sofia exchange since its launch in 2005.
It will be appreciated that the other side of such liquidity is exposure not just to fluctuation in the value of farmland but also to the potentially much more volatile performance of equities markets, especially in emerging economies and countries in transition. Additionally, an ordinary investor in the shares of a REIT has minimal influence on decision-making, relying almost totally on the competence and integrity of a remote management. When in 2011 Advanced Terrafund booked a substantial increase in the value of its farmland holdings, its auditors (Deloittes) tagged the annual accounts with the observation that the revaluation was not supported by real market transactions and might bear little relationship to actual sale prices should the holdings need to be liquidated. As noted in the previous paragraph, this blunt talking has not blunted the company’s share price, suggesting a disconnect between underlying value and market sentiment, raising the question of whether markets know better than auditors).
For our profile investor, ‘go it alone’ farmland investment is not a realistic option in developed countries, with the funds being insufficient to finance the purchase of a viable, stand-alone farming unit. Such investor needs examine the opportunities in those parts of the world where values remain low relative to, say, the UK. But it is in such countries that the risks of going it alone are highest, being risks related to the legal and administrative regimes, along with local attitudes to foreign investment, at the acquisition stage, during the subsequent tenure and when it comes to liquidation of the investment. There being ‘safety in numbers’, syndication presents as an attractive alternative to going it alone. Ideally, the investors in a closely-held farmland syndicate will have had prior connections and be clearly of one mind, with a clear investment objective and a competent venture management. Investment in a commercially promoted syndicate reduces the degree of ‘hands-on’ involvement of participants and – in many instances – funds the promoter’s primary objective, which is an ongoing revenue stream from the venture’s management.
Neither going solo nor syndication afford easy liquidation of the investment, should that become necessary. In practical terms, withdrawal at an acceptable – or indeed any – price may be impossible in the short to medium term. The farmland investor seeking a realistic prospect of being able to exit at short notice must look to indirect investment via publicly-traded stock in a farmland investment company. The trade-off is very limited influence over the company’s investment and operational decisions and exposure to equities market volatility. The next part of the series will explore the external factors which influence farmland value, continue reading here.