Investment funds are the new landowners of Spanish agriculture
From asphalt to farmland. Large investors have set their sights on the Spanish countryside, an alternative asset to the traditional brick. Farming offers a high return in relation to risk, allows diversification of portfolios, is an umbrella against inflation and far from the shocks of the financial markets.
A global trend
Seeking refuge in agriculture is a global trend that has caught on even among the wealthy. Bill Gates has become the person who owns the most farmland in the United States, with more than 100,000 hectares, according to the website The Land Report. Over the last 15 years, rural assets have been on investors' radar. "Globally, there has been a 15-fold increase in the number of funds investing in the purchase of agricultural land," according to the consultancy firm CBRE.
In Spain, the transfer of land from the hands of farmers - suffocated by high production costs, lack of profitability and the absence of generational replacement - to investment funds is causing changes in the configuration of the countryside. ‘There are fewer farms, but they are becoming larger, less family-run and more technology-intensive. In the last five years, entrepreneurs from other sectors, such as real estate or the stock market, as well as investment funds have arrived, which has relegated the traditional farmer to a residual role,’ an appraiser points out. The proof is in 2021: 160,398 rural properties were sold, the highest figure since 2007, according to official statistics. Up to October 2022 there are already 131,749 transactions of this type.
Investing in agricultural land
The unbridled appetite for investment in agricultural land is based on one irrefutable fact. ‘It is a real and simple asset, based on land and water and responding to something as basic and fundamental as human food,’ says Héctor Rodríguez, associate director of CBRE Agribusiness.
Leaving aside the necessary growth in food production to support a growing world population, the agricultural sector has proven resilient during the great recession of 2008, the COVID health crisis or the current invasion of Ukraine. Investment funds put down roots in Spain because it is one of the EU's leading agri-food producers and the fourth largest exporter, especially of pork, fruit and vegetables, wine and olive oil. In recent years, the Spanish agricultural sector has matured sufficiently to become an attractive opportunity for international investors, who have the necessary capital to undertake the transformation that many farms still require.
Not many businesses offer as much
Experts insist that not many businesses offer as much. ‘It is rare to find a sector that combines solid historical returns above 10%, good visibility and recurring cash flows over the long term, low correlation with most other assets, with a strong resilience to economic cycles and inflation hedging,’ Rodríguez stresses.
The appraisal company Tinsa calculates that the average profitability of crops (excluding taxes and subsidies) is between 4 and 11%, with vegetables being the crop offering the best yield, followed by greenhouse crops, citrus and other fruit trees. If there is purchase and management of the land (either directly or through an operator), the risk increases and returns range from 7-8%. In contrast, traditional real estate investors do not seek exposure to risk. They acquire properties with the objective of renting them to a tenant who offers them security and a fixed return. According to CBRE, ‘sale and leaseback transactions of assets or portfolios are the most common’. The profitability in this case is above 5% per annum.
There is one determining factor when it comes to investment, and that is the security of water supply. ‘Irrigated properties have seen their value increase in those areas where water supplies have been maintained and future restrictions are not a high risk,’ says Cristina Arias of Tinsa. There are 3.8 million hectares of irrigated land in Spain. In addition to irrigation, the most attractive farms for investors are those that are larger than 200 hectares, flat and suitable for growing olives, nuts, citrus fruits, tropical fruits or vines. ‘The aim is to generate economies of scale and improve the return on investment through intensive and super-intensive cultivation techniques,’ Arias adds.
157,000 euros per hectare
The region and the type of crop determine its value. New farm properties with irrigation infrastructure in Andalucía can reach 30,000-40,000 euros per hectare (permanent crops), but an avocado farm (in full production) can exceed 120,000 euros per hectare. According to the Tinsa report SueloAgrario_2022.pdf (agronegocios.es), the most valuable cultivated hectare corresponds to greenhouses (157,000 euros), followed by open-air vegetables (72,000 euros) and irrigated citrus fruits (53,000 euros), irrigated olive groves (36,200 euros) and non-citrus fruit trees (36,000 euros).
Land purchase is only one branch of this fruitful business. ‘The number of funds involved in agri-food companies has increased tenfold,’ CBRE estimates. Mergers and acquisitions of companies in the sector are common among private equity funds, which began to operate with large transactions in both Spain (in Andalucía en Extremadura mainly) and Portugal in 2015. They are mainly looking for agri-food companies to grow the business and later disinvest.
Latest operations in Spain
In 2022, funds such as Nuveen (through Westchester, whose holding company is the US pension fund TIAA), the Canadian pension fund PSP, Climate Asset Management (an initiative of the bank HSBC) and the Spanish family office Persán have entered the Spanish market, according to CBRE. Firms such as Nuveen or PSP are among the world's largest owners of farmland, mainly in North America.
Large private equity has found reasons to invest in this type of alternative investment to traditional real estate. The easiest way to access this market is to buy the asset and rent it to an operator, usually on contracts of more than 20 years.
Attracting investment to empty Spain
The government is considering allowing REITs to acquire agricultural estates, beyond the urban real estate assets in which they can currently invest, as in other European countries. This would be a way of attracting investment to rural Spain, in order to revitalize an ageing environment with small plots and unprofitable crops.
A proposal has reached the Ministry of Finance at the initiative of the company Armanext. This initial proposal stresses the opportunity to replicate the urban model in the countryside, separating land ownership and the companies that exploit the agricultural business. One of the problems that Armanext points out is atomization, as 583,000 farmers currently only obtain 3% of the production, compared to 78,000 - both individuals and companies - who account for 72% of the value of agricultural activity in Spain. According to this consultancy firm, only by joining plots of land and investing in crops could the sector be revitalized and profitability improved.