Pension funds bulk up on farmland investments

Pension funds worldwide are deepening their commitment to farmland, upping investments by billions of dollars and moving to active strategies, as a way to diversify from riskier investments.

Leading the charge are U.S. and European pension funds, although it is estimated that the amount of institutional money invested is less than 1% of global farmland value, with a concentration in food exporting regions.

TIAA-CREF has invested about $2 billion in farmland, of the $426 billion it has under management, and is looking to expand its holdings in the area.

“If we found the right opportunities we’d be willing to double our existing exposure over the new few years,” said Jose Minaya, managing director of global private markets at TIAA-CREF.

“This is just another asset class that has the potential of going the route that real estate, private equity, hedge funds did in the past,” said Minaya, who estimated that between $5 billion and $15 billion of institutional money is invested globally in farmland.

TIAA-CREF prefers to own farmland directly rather than through funds. “In general the larger pension funds are moving closer to a more active versus passive investment style,” he added.

Jos Lemmens, senior portfolio manager at Netherlands-based APG, said it plans to raise its interest to about 1 billion euros ($1.22 billion).

Traditionally, the fund manager has invested in agricultural via commodity futures markets, but it has also invested in farmland since 2007.

“Part of [our] strategy is more efficient allocation to commodities, part of that strategy is to own real assets, especially land,” Lemmens said.

Netherlands health care pension fund PGGM, which has about 90 billion euro ($109 billion) under management, has said it may raise its allocation of funds to farmland at its next annual review.

Pension funds are known for being risk averse and farmland is no exception, with funds primarily focusing on food exporting countries that have a stable political backdrop. Pension funds’ farmland assets are concentrated in grain exporting regions, such as the United States, Latin America, Central and Eastern Europe and Australia.

However, interest in investing in farmland is coming from countries with limited food production, such as Saudi Arabia and China, as they look to secure future needs. But the strategies adopted by China and some of the major governments purchasing farmland have been controversial in Africa and parts of Asia where food security is an overriding issue locally, leading some funds to tread carefully.

“If you’re in a country where you’re a net importer of food and suddenly you have foreigners buying land, that could get politically sensitive, so we’ve generally stayed away from countries that are big net importers,” said Philipp Saumweber, managing director of Saumweber Holdings.

Some analysts are skeptical about how easily pension funds can expand holdings.

“There’s lots of interest, but little action. It’s difficult to deliver what these funds want, [which is] vast acres of cheap land in politically stable regions,” said Andrew Shirley, head of rural property research at estate agent Knight Frank.

Shirley said that Brazilian farmland prices, as an example, vary dramatically from less than $277 per hectare for undeveloped forest to more than $11,000 per hectare for double-cropping arable land. In the United States, where pension funds have been investing in farmland for some time, the U.S. Department of Agriculture reported that the average arable values for the corn belt are at $9,562 per hectare in 2008, according to Shirley.

“There are undoubtedly opportunities for investors, but finding them is not easy or cheap and requires a huge amount of knowledge and expertise. There is no simple solution for pension funds looking to invest in global farmland,” Shirley said.

“Seventy percent of productive land is already in use in the U.S. so the expansion of real estate is limited. Whereas in Brazil only 20% of arable land is used,” said Suzanne Petrela, partner at private equity firm Red Reef Partners.

Africa is seen as an interesting investment opportunity, with the region’s overwhelming potential providing a long-term draw, but the risks have so far limited investments there.

“As the market develops, people will see opportunities in different regions and there’s always going to be pools of money that are seeking higher return strategies,” said Minaya of TIAA-CREF.

While some of the bigger pension funds in Europe deepen their investments, others have started to latch onto the idea of farmland as an alternative investment.

For example, U.K.-based BMS Group pension scheme and Merseyside Pension Fund, which do not hold farmland, is attracted by the long term investment horizon of between 10 and 30 years for farmland as it helps to manage illiquidity with farmland sometimes proving difficult to buy and sell quickly.

“The investment characteristics I am looking for are steady long-term growth, ideally sound inflation hedge, preferably lower correlation with equities; looking to capture value through active management; socially responsible investment,” said David Larson, chairman of the BMS Group pension scheme.