MASTERCLASS Investing – Agriculture as an investment in your SMSF for yield?

MASTERCLASS Investing – Agriculture as an investment in your SMSF for yield?

Investing – Agriculture as an investment in your SMSF for yield?

(Selected extracts from Investor Update 2015-02 of the Australian Investors Association)

The Australian commercial property sector is well serviced with fund managers and investment funds designed to meet the needs of tenants and investors. In contrast the agricultural sector, though of comparable scale, has only one fund designed for this purpose: the Rural Funds Group (ASX: RFF)…

Australian agriculture utilises 405 million hectares of land, which is 53% of the country’s total land area. The industry is relatively fragmented with 120,000 businesses reporting that farming is their principle business. Rural Funds Management (RFM) has estimated that the total value of the land and improvements of these businesses is just over $200 billion3.

Added to this are substantial processing and infrastructure assets, typically owned by food processors and agricultural commodity marketers, whose total assets add tens of billions to the value of the agricultural property sector. RFM estimates the total value of investment grade assets in Australian agriculture is of the order of $150 billion, making it a larger sector than the office, retail or industrial property sectors detailed…

Despite the scale of the agricultural sector, it is estimated that only 4% of agricultural property in Australia is leased compared to around 40% for the US and many European countries. Why is Australia’s leasing rate so low, and why has there been no equivalent emergence of property fund managers facilitating property leasing?

The main reason is the relatively low lease rentals paid by broadacre4 farm enterprises. Broadacre farms can be leased at a rental yield of 5% of the capital value of the farm. This compares with an office building in the centre of our cities that would lease on a yield of 6-7%, and industrial warehouses on the fringe of our cities that lease for around 9%. On the surface then, leasing commercial property would appear more attractive.

However, higher lease rentals on commercial property may be due to the depreciation occurring on the structure or building that makes up the majority of a commercial property’s asset value. In contrast to commercial property, broadacre farms have much lower levels of depreciating infrastructure installed on them. In fact, modern cropping properties often have no fences, no buildings and just a few dirt access roads.

As a consequence the asset is an almost pure natural resource with no wasting infrastructure detracting from long term returns. While broadacre lease rentals may not be diminished by depreciation, the fact remains that the net yield generated by these assets is too low to compete with the investment yields historically generated by fund managers of commercial property. The Rural Funds Group (ASX: RFF) has addressed this dilemma by accumulating a mix of agricultural assets, that include the natural resources of land and water, but also substantial infrastructure capable of generating higher yields. As a consequence of this asset mix, RFF is able to distribute investment yields that exceed the majority of REITs.

RFF then is uniquely placed. Just as commercial property fund managers have provided a service that assists Australian business, while meeting the expectations of their investors, RFF has become Australia’s first agricultural REIT to serve Australian farm businesses and meet the expectation of its owner – the RFF unitholders.

David Bryant is the Managing Director Rural Funds Management.

(Note – SuperBenefit has no connection and is NOT giving advice or any recommendation for any specific investments on this website or other means – seek your own research and advice, or ask to be recommended to an advisor)

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