Inside the Minds of Institutional Investors

Inside the Minds of Institutional Investors

How investment firms look at land

To say institutional investors have a newfound appreciation for farmland is an understatement. Of the $1 trillion tied up in U.S. farmland, only $3 billion is from institutional investors, such as investment, insurance companies or pension funds. However, that's an increase of about $1 billion over the past two years.

So how do those investors determine when and how to pull the trigger on a property?

Clearly every fund approaches land differently. We talked to one sector leader to learn more.

Jim McCandless

"We have a pricing model that is a proprietary way to help us make decisions on properties we acquire," says Jim McCandless, Managing Director and Head of Global Real Estate-Farmland at UBS, a global investment and wealth management company. " It's based on current yield requirements, current yields in the market based on net rents, regional and crop type breakdown, appraisal data, and targets set for each region and crop type based on our view of relative risk or return tradeoffs."

For cash rent, UBS wants to be fair and sustainable for the long haul, says McCandless. "Some of our properties have been farmed by the same people for over 20 years and some are on multiple year leases. In all these leases we want to make sure the farmer can make money," he says. "It's also our objective as fiduciaries to pension plans to do the best we can for them."

Multiple lease options

UBS looks at cash rents on 1, 2 or 3 year terms. The company also offers five- to seven-year leases on permanent crops like almonds or fruit orchards. These "participating rent" leases include a minimum fixed rent payment or percent of gross, whichever is greater; the tenant pays property tax and insurance.

"We have years with outstanding returns and other years more modest returns," he says.

UBS also employs flexible cash rent leases. These have minimum fixed rents and a formula for a flexible component that looks at a 10-month average of CBOT price times actual yield minus a fixed gross income amount times 25%. "This lets everyone share in the upside when there are good yields and prices, but also mediates the income from years when yield, price or both, are low," says McCandless.

UBS looks to buy farmland at a minimum value of $1 million, "unless we see other properties in the area that are coming for sale," he says. The average value of farms in the UBS portfolio is about $5 million.

Diluted returns

You won't likely see companies like UBS in a bidding war for farmland, says McCandless. In fact, recent higher prices have kept them out of the recent Corn Belt buying frenzy.

"We haven't purchased property in the Midwest recently because we can't get a good enough return," he says." Either prices are too high or rents have not kept up with land values. If we were to acquire anything in the Midwest it would actually dilute our returns. Every property has to make at least a 4% return and it can't be averaged in with other properties we own.

"There is a risk in owning farmland," he concludes. "We could see short term declines in land values triggered by unexpected higher interest rates, a sharp decline in commodity prices or continued increase in input costs."



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