Meeting broader ESG objectives
New macro trends mean traditional approaches to investment may no longer be enough to achieve investment goals. Sustainability and technology cycles, together with an ultra-low interest rate environment, mean that investors are hungry for returns from assets that offer risk resilience in a rapidly changing world. Alternative assets will, of course, diversify a portfolio, but could also enhance returns beyond what is currently offered by traditional investment strategies. Here we set out a high-level guide to four alternative, land-based asset classes that can help meet broader ESG (environmental, social and governance) objectives.
Reasons to invest
Farmland has long enjoyed a reputation as a counter-cyclical safe haven asset, attracting investors looking for long-term capital appreciation and, particularly, development potential.
Covid-19 has accelerated a move towards remote working and heightened demand for outdoor space, meaning rural property is now viewed as an increasingly desirable lifestyle asset.
Covid-19 has accelerated a move towards remote working and heightened demand for outdoor space, meaning rural property is now viewed as an increasingly desirable lifestyle assetAndrew Teanby, Associate Director, Rural Research
Interest in farmland has also been building due to the role it can play in addressing the climate and biodiversity crisis through new natural capital derived revenue streams, such as biodiversity net gain, water management and carbon sequestration.
Both let land and that used within a trading business benefit from 100% relief from Inheritance Tax after a qualifying period of ownership, creating competition from private investors. The transition away from EU agricultural subsidies means that traditional occupation models, such as farm business tenancies, are likely to come under pressure during the next five years. A long-term view is needed.
UK agriculture finds itself at what will likely prove an historic juncture. Subsidy and tax reform, as well as tough economic conditions, could encourage an increase in supply to the market in the short term and could put downward pressure on values. On the other hand, meat and grain prices are currently strong, countering this pressure, at least in part. It is important to remember that a range of fundamental, long-term drivers, such as demand of competing uses, shortage of supply and lifestyle attraction, underpin the market.
Reasons to invest
Last year renewable energy accounted for around 40% of the UK’s energy mix. That is astounding progress and growth, as it was just 6% in 2010. Yet there is undeniably some way to go before our energy supplies can be considered green, as they surely must be by 2050. All industry sectors are going to need renewables to reach net zero. Transport and housing are both likely to turn towards electrification or carbon neutral fuel substitutes, such as biogas, to green their respective sectors.
This shift will not be without issue. Energy infrastructure has centred upon the distribution of abundant, chemically stable, energy dense fossil fuels. Renewables will radically change the demands that are placed upon infrastructure. But in this shift there are also parallel opportunities to invest in energy infrastructure, such as battery storage or electric vehicle charging.
Renewable energy is a diverse proposition and investors should keep an open mind. Subsidies remain available for a limited number of technologies, providing short to medium-term confidence in returns. That is not to say unsupported technologies are a riskier investment. In these cases, the market may simply have matured beyond the need for assistance, expanding organically due to the inherent global need for renewables. Each have their own risk and reward profiles, allowing investors to tailor their investment decisions to those opportunities that are most complementary to their investment objectives.
Reasons to invest
Evolving policy and action around the sustainability agenda has shone a light on forestry as not only a financial investment, but also an environmental one. Environmental concerns mean the sector is now attracting a diversified investor pool looking to capitalise on carbon capture. In addition to this, forestry retains its traditional benefits and means of creating revenue. The timber trade is global and has been insulated from European trade disruption; the annualised growth in UK timber prices was 10.6% for the five-year period to 2020–21. Timber cropping is also long term, reducing its exposure to short-term disruption and volatility.
Demand for woodlands is exceeding supply and it is not unusual for some forests to sell for 30–70% over the asking price. Competition for these scarce assets could see demand exceed the market realities and so a cautious approach should be taken with long-term investment strategies.
Demand for woodlands is exceeding supply and it is not unusual for some forests to sell for 30–70% over the asking priceAndrew Teanby, Associate Director, Rural Research
Strong timber prices and capital values mean forest properties that were traditionally considered to be less popular, mainly due to location and the expectation of poorer commercial returns, are now seen as viable options. While never destined to produce the same output as prime forest, these existing forest sites have few of the constraints levied on new plantings and therefore offer good opportunities to investors willing to improve assets over a longer time frame. This is demonstrated by increasing prices for secondary or even tertiary forests with the expectation that by focusing on the better soils within the forest, drainage, species change and improved growth performance, the second rotation, even over a potentially smaller net area, is likely to outperform the first rotation.
Reasons to invest
Rising geopolitical tensions and increased trade friction have placed food security in the policy spotlight of nations across the world. Vertical farming is the practice of growing crops in vertically stacked layers, often indoors and often using controlled environment agriculture (CEA). It is currently one of the most scalable methods of delivering food security and numerous other co-benefits. There is little need for pesticides, water consumption can be reduced by up to 95% compared with conventional farming and there is greatly reduced danger of environmental damage from fertilisers. Crops can also be grown that would not be possible in the local climate. All this can be achieved within a comparatively tiny footprint of land.
There are some drawbacks to CEA, particularly through operational expenditure. Every element of the growing system, from lighting, to temperature, to hydroponics, creates an energy cost. Such expenditure can be exacerbated by unnecessary optimisation, such as introducing robotics. For this, the business case compared to skilled manual labour needs careful investigation. Upgrading to more efficient LEDs or utilising renewable energy sources may prove the more prudent decision.
Investors can take steps to minimise operational expenditure by identifying sites that are co-located with other facilities. Heat and carbon dioxide are both waste streams from an anaerobic digester, but these can be valuable inputs to a vertical farm. Also targeting high-value crops rather than low-value leafy greens will increase returns. Microgreens, flowers and even tree sprouts are some alternatives that can be grown, as well as cannabis for the pharmaceutical market.
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