Land values are set to increase worldwide as the commodity is seen as an attractive investment with stable returns, according to a new report.

The straight line trend for international farmland values has remained positive, says the report from consultants Savills but most mainstream investors have yet to look at land although analysts believe this will change over the next few years.

In the shorter term, it is expected that demand for agricultural investments from family offices, financial investors and also the sovereign wealth funds will increase. Also farmland will become more prominent as a sought after asset, as world farmland markets become increasingly accessible and new emerging markets open up, creating new opportunities.

The report also says that as concerns over food security become greater and the use of land for agriculture comes under pressure, the financial sector and some governments/sovereign wealth funds have now joined the increasing numbers of private investors who are now appraising the investment opportunities. Some have already invested in the sector.

Their motives differ, the report says. For example, the financial investors seek long term risk adjusted returns and portfolio diversification, while governments and sovereign wealth funds are looking for surety of the long term supply of foodstuffs.

It points out that food consumption is expected to double by 2050, with both the world’s population forecast to grow by over 40% (an extra 2.7 billion people) and also an increase in the demand for higher protein diets as the emerging markets become wealthier.

At the same time, production/supply is expected to shrink, with pressure from a wide range of factors including urbanisation, climate change, the demand for bio fuels and rising input costs.

Although the recession has affected levels of growth in some countries, Savills expects the basic economics of supply and demand will continue to support farmland values globally. Returns will vary in absolute terms and the degree of volatility will depend on a number of factors. These include whether a farmland investor has elected to either participate in the business of farming with its higher returns/risk profile, or take the more stable returns of cash rents as a landlord. Other factors include location and enterprise selection.

‘Potentially higher returns are possible in emerging or even frontier markets, where entry values are low or agricultural production is currently underperforming. Opportunities in emerging markets exist in parts of Central and Eastern Europe (CEE) and South America. Opportunities in the frontier markets include sub-Sahara Africa,’ it adds.

It also points out that land prices vary significantly between regions and within countries. For example, in Brazil similar land with the same productive capacity can be four times more expensive in one region compared with another. In the EU prices for similar quality land can vary by a multiple of ten across the region.

‘Agricultural land has shown it is a tested store of value in inflationary environments. In addition, the returns from agricultural investments have a weak correlation with mainstream investments, which means agricultural property performs well when other assets show poor returns. This is an argument for including agricultural property in a mixed portfolio, to reduce risk and also boost overall portfolio performance,’ said Ian Bailey head of Savills rural research.

With a growing investor interest in the sector, strategic international farmland values continue to strengthen. This is fuelled by: the desire to find alternative forms of investment, stability of the sector, the long-term trend of rising land prices and the now well publicized ever increasing demand for agricultural commodities.

International Farmland Market Bulletin 2011

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