David Muth of Peoples Company Capital Markets, the Investment platform for Peoples Company, shares how institutional investors have reacted to higher interest rates on their land investments pursuits.
“There’s certainly a significant infrastructure of institutional farmland investment groups that are committed to this to the asset class,” he says. “They’re committed to continue maintaining their portfolios and we’ll continue to see quite a bit of activity from those folks, but certainly there is there is a bit of a changing dynamic in their capital stack overall.”
He says while farmers are buyers in more than 80% of the farmland transactions today, the past 30 years have brought changes in who buys farmland and how it’s bought. What started in the ‘90s with more institutional ownership of U.S. farmland became a structured opportunity at a larger scale in the early 2000s. Today, there are multiple farmland REITs such as Farmland Partners and Gladstone Land Company.
Peoples Company recently released a white paper “The Evolution of Farmland As an Institutional Asset.”
Farmland as an investment has five unique characteristics compared to other options, says Muth:
- It’s stable
- Investors get cash yield
- Its appreciation rate
- Has a driven long-term outcome
- Zero vacancy rate
Muth discusses the current trends on the Top Producer Podcast:
“Certainly, when we went into the financial crisis in 2008, you started to effectively see a lot of the long-term fixed income types of products go to zero. Then you started thinking about quantitative easing and all of the Fed tools that were deployed formally. It became really appealing for a lot of these funds in this class of investor to look at farmland.”
Muth says a few parameters have emerged for the type and location of land deal most appealing to the institutional investor.
“It’s regional—you see a heavier institutional presence in California, the Pacific Northwest, and the Delta,” he says. “These groups target a specific size of deal--$10 million is the threshold typically because of due diligence and overhead costs going into each deal.”
The current interest rate environment has deflated some of the appeal of farmland for this type of investment.
“One significant element is just simply the increasing cost of debt,” Muth says. “A lot of the large institutional farmland buyers will use leverage in order to create a higher IRR (internal rate of return) outcome. And if you go back to when we were really seeing a lot of these funds build right the portfolios built, debt was incredibly cheap.”
Even with higher land rents, Muth says that has not kept up with the service debt costs which have doubled or even tripled in the past several years.
He adds at the same time other investments are showing better annual cash returns from fixed income outcomes and products.
“If you look at farmland values in the Corn Belt, 2% cap rates are pretty common. But you can go out and get fixed income at 5% or 6% with some really stable products these days,” he says.
Muth says farmland investors are still looking for deals—deploying a strategy of looking for distress deals for example in California almond production or Washington state apple production.
New Tools Bring New Investors
Peoples Company has partnered with Acre Trader, which is introducing farm land ownership as a retail investment.
“For folks that maybe don’t have the capacity to go out and buy a farm on their own, for this group or class of investors, Acre Trader enables access to the farmland asset,” Muth says. “They’re representing a movement of retail capital into farmland, and we’ve gotten really interested in working with registered investment advisors and wealth managers.”
New Land Analysis Tool Puts a Twist on Plat Book Concept
Muth shares more on Top Producer Podcast:
