Agricultural land in Australia has historically been held by families, either directly or within a family trust, and a handful of pastoral companies. Leaving aside timber schemes, institutional investors have not been prominent in Australian agricultural or primary industry land holdings to date.
Change is imminent, as the purchasers of agricultural land holdings today are more likely than ever before to be institutional and/or offshore investors with larger holdings. This has consequences for the nature of land holdings and farming operations in Australia.
Why is this change occurring?
There are a number of reasons. A two-tier market has been established by the lending practices of Australian banks; lending criteria has tightened for lending to individuals or families for the purchase or operation of a single farm. Generational change in farming families also means that it is no longer assumed that the farm will remain in the family for future generations.
There is a trend towards homogenization of fresh produce in supermarkets, which can only be met by having farming operations of a significant scale, and it is more efficient for major supermarkets to deal with fewer suppliers who can supply larger quantities of fresh produce. Food security and supply issues are also a factor, having particular relevance to Asian and Middle East investors, and they throw a very different investment driver into the mix.
To protect the food supply chain, investors sometimes acquire other assets within the supply chain – for example, logistics and processing facilities. The ancillary investment into those other assets requires significant capital.
The introduction of the Significant Investor Visa (or “SIV”) may facilitate further investment through fund structures as high net worth individuals, especially from Asia, seek to access this recently introduced immigration pathway into Australia. The SIV, once granted, allows the individual and their family to reside in Australia under a 4 year provisional visa, which can be extended for up to a further 4 years and then converted to a permanent visa. Importantly, an innovation points test, upper age limits and English language threshold requirements do not apply, and so the SIV is more flexible than other types of business or investment visas.
The SIV requires investment by the individual of at least A$5m through an ASIC-regulated fund which holds certain types of assets, which can include agricultural real estate assets.
The SIV has already attracted a lot of interest from high net worth individuals in China in particular, and it seems that immigration entitlements coupled with investment in the Australian agribusiness sector could be a powerful combination.
Colliers International has observed a number of foreign investment trends in agribusiness recently, particularly in the wine industry. According to Angus Barrington-Case, Director of Rural and Agribusiness Valuation at Colliers International, “The link to Asian distribution networks gives an advantage to the offshore investor that Australian investors may not be able to capture. There have been a number of wine industry sales throughout Australia’s premium wine growing regions, typically within a two hour commute of Australian capital cities, that have occurred at rates a step ahead of the general market. These transactions demonstrate that in a number of instances, offshore investors have had a more positive view on the market than locals, or alternatively, greater access to funds to purchase the properties or better access to distribution networks.”
Consequences of the change
The nature of agricultural operations means they can be significantly impacted on a seasonal basis by factors such as weather, natural disasters and fluctuations in commodity prices.
The resulting risks to cashflow are sometimes inconsistent with the investment criteria of institutional investors. For this reason, it is becoming increasingly common for the acquisition of agricultural land holdings to be subject to a leaseback, so that the vendor pays a rental to the new owner of the land and continues to carry on the farming operations as a tenant of the land. The vendor (now a tenant) retains a level of risk and reward from the success or otherwise of those farming operations, and the new owner (now a landlord) has the benefit of a relatively consistent income stream that can be distributed regularly to investors.
In recent times, there has been a trend towards sale and leaseback arrangements. Barrington-Case says “These transactions have typically occurred within the capital intensive sectors, such as horticulture and irrigated agriculture. There are also examples within the forestry and broad hectare sectors, however they are less common. In most instances, investors are looking for returns of between 8% and 10% of total funds invested, which generally limits this kind of capital injection to vertically integrated businesses which can value-add the agricultural commodity or access global markets.”
Therefore, for the right sector and asset, the benefits to the vendor are clear. Barrington- Case says “Given the current low returns within the Australian agricultural sector, many farm operators are highly leveraged. A sale and leaseback provides a capital injection to the business to ensure a viable operating future and retention of good farm management.” However, he warns that these transactions need to be assessed on a case by case basis, as they will not always provide the best outcome for either party.
A sale and leaseback arrangement can also take advantage of the “flow-through” taxation status of trusts, so that income is taxed in the hands of the investors, applying any concessional rates and discounts available to those investors.
There are a number of commercial and taxation matters to be worked through under a sale and leaseback arrangement involving an institutional investor as landlord, such as:
- an appropriate allocation of risk and reward from the farming operations, which might be reflected in the rental structure;
- ensuring that the income to the landlord can be properly characterized as rent, so that the Australian trading trust provisions are not triggered;
- the extent to which produce from the farming operations is sold or processed through the marketing and supply chains of the landlord, to take advantage of the landlord’s scale of operations;
- the extent to which the landlord is entitled to visibility and/or control over the farming operations, particularly towards the end of the lease;
- ensuring that the landlord has appropriate rights in relation to material operational licences and permits, particularly water entitlements, so that the landlord ends up with a saleable or leaseable asset at the end of the lease;
- retaining flexibility at the ownership level for new investors, and for existing investors to exit, ideally in a tax-efficient manner; and
- achieving the right stamp duty and GST treatment for the arrangement.
The structural changes in farm ownership are likely to contribute towards consolidation of agricultural land holdings in Australia. Ultimately, if this consolidation continues to occur, it should put the Australian industry in a more globally competitive position and allow food producers to focus on issues such as sustainable farming practices, resource management and productivity gains.