Today, Savills publishes its Global Farmland Index; a new measure of performance for farmland around the world, which clearly shows the dominance of the emerging markets in capital value growth terms. The Index is composed of farmland data from 14 countries from 2002 to 2010 and the domestic currency is converted to US$ per hectare.
During this eight year period growth was most significant in the emerging markets of South America and Central Europe namely Brazil, Argentina, Poland, Romania, Hungary. In Romania for example, land values increased by 1817% (US$ per hectare) between 2002 and 2010. For the Central European countries this growth is explained by entry into the EU, which has reduced but not yet fully removed the restrictions on foreign ownership and access to EU farm payments and capital improvement grants.
Farmland values in the South American countries of Brazil and Argentina have also strengthened significantly during the Index timeframe, albeit from a low base. In 2002 about 800 US$ could buy a hectare of land in Brazil which in 2010 cost 5,200 US$. Legislation introduced to limit the scope of foreign investment has moderated growth rates recently but they continue the trend upwards.
In contrast, there has been more variation in the mature markets included in the index. Overall growth over the period has been more muted in Germany, US, France, Denmark, Ireland, and Canada. However, this masks the period of accelerated growth and following correction in Northern Ireland, Ireland and Denmark. Although political and economic uncertainty is low across Western Europe, the markets in Denmark and France are still restrictive to foreign ownership and in Ireland large scale farming opportunities are rare, hence these countries will not feature high on an investor’s shopping list.
The UK has behaved differently and values continued to rise with significant growth of 17% taking place between 2007 and 2010 and 8-year growth of over 200%. Likewise in the US average cropland values increased by 75% between 2002 and 2010. The UK and the US still represent good places for farmland investment, although the UK proposition is weakened by farm scale and low turnover.
Australia and New Zealand both outperformed the US and the UK over the eight years recording rates of growth of 300% and 262% respectively. The opportunity for large scale farming is a key driver, especially in Australia, but location is critical with the best opportunities requiring adequate rainfall/water, good soils, and infrastructure. Australia also scores well in terms of political and economic stability and there is a good volume of land traded annually.
The available evidence suggests that Africa is a continent with high growth potential in the agricultural sector, where long term underinvestment offers exciting opportunities. However, the risks and challenges are high, which at a practical level include land tenure and poor infrastructure.
Ken Jones Director of International Farmland Markets comments, “Capital growth is rarely the only determining factor for farmland investment and while significant growth rates have been recorded in many of the emerging markets these need to be set in the context of the opportunities to maximise income return. In more developed economic areas yields range annually between 1.5 to 4% but in emerging investment areas 5 to 8% is more typical.”