Farming landlord Westchester Group open to joint ventures

The world’s largest manager of farmland assets says the turmoil caused by COVID-19 has heightened the appetite for Australian rural assets.

The chief executive of Westchester Group, Martin Davies. ‘Australia is a destination that we very much like. It is a sophisticated and developed market. It is a good place to do busines.’

The world’s largest manager of farmland assets, Westchester Group Investment Management, says the turmoil caused by COVID-19 has heightened the appetite of global institutions for Australian rural assets and is open to partnering with local superannuation funds to build on its $1bn-plus local farm portfolio.

In his first Australian interview since becoming CEO of the Chicago-based group 2½ years ago, Martin Davies said the “durability and resilience” of local farming assets would see Westchester look to deploy more capital in Australia after quietly building a portfolio of large-scale cropping, grape, cotton and almond farms in four states over the past decade.

Westchester, the farmland investment funds of the giant Teachers Insurance and Annuity Association of America (now known as TIAA, formerly TIAA-CREF), is the largest manager of farmland globally with more than $US8bn ($10.8bn) of assets under management.

It invests in seven countries across 43 crop types and 13 per cent of its global asset portfolio is held in Australia.

Mr Davies said he expected COVID-19 would enhance the attraction of farmland as an asset class.

“In more recent times, there has been much more interest in infrastructure and real estate. Quite frankly the returns that have been achievable from those assets have probably been better. But with what is going to happen to both through the current situation, that is one of the great attractions of farmland — the durability and resilience you get,’’ he said from his home at Cambridge, north of London. Prior to COVID he was a regular traveller to Westchester’s Chicago head office but has since been running the group’s global empire from Britain.

Australian superannuation funds have been reluctant to invest in the local agricultural sector, wary of the volatility and the illiquidity of the investments.

One of the few notable super fund investments of scale was the Queensland Investment Corp and VicSuper’s purchase four years ago of a stake in NAPCo, one of Australia’s largest cattle portfolios that controls 5.8 million hectares in Queensland and the Northern Territory.

Macquarie Group’s agricultural arm is separately pouring more than $3bn into three special Australian-focused agricultural investment funds and now owns and operates 50 large-scale farms in Australia worth more than $2.5bn.

Mr Davies said he was open to partnering with local institutional investors on new opportunities arising from the COVID-19 crisis.

“I can’t put my finger on exactly the reason why the super funds haven’t done more in the agricultural sector. Maybe the current situation will generate some more interest and we will see more activity. It certainly would be an asset class that is complementary to super fund investment portfolios,’’ he said.

“We would hope there would be more interest from local super funds (post-COVID) and we would be interested in having those discussions with interested parties.”

Pension funds out of Canada, America, Europe and the Middle East and Chinese state-owned enterprises and private corporations have made substantial investments in Australian rural assets in recent years.

Late last year another TIAA subsidiary, Nuveen, launched a global agricultural fund targeting $US2.4bn, which is looking at opportunities in Australia.

“It goes back to the point that people like Australia as a destination to invest. We would observe over the past 10 years there is a much higher degree of competition for assets which come to the market. Another thing that does attract institutions to Australian farmland is the scale that is possible,’’ Mr Davies said.

Australian farmland has delivered an average compound annual growth of 7.5 per cent over the past 20 years, including 13.5 per cent last year, according to Rural Bank.

While the bank said it expected farmland values to grow at a reduced rate over 2020 due to COVID-19, it offered consistency as an asset class if investors looked beyond short-term volatility and seasonal vagaries.

Colliers International has said it expects rural property values to hold firm, supported by global food demand and favourable growing conditions, despite the potential for COVID-19 to disrupt supply chains and the headwinds of the rising Australian dollar.

Mr Davies said despite ongoing shifts in food consumption trends, the dynamics in the sector remained compelling and farmland returns were not expected to differ much from past downturns.

“We don’t expect COVID to have a huge impact to both income and capital growth returns.

“In the current situation, if you look at every location globally, there has been a significant uptake in grocery trade. People have to eat. The growth demand is still there. That drives resilience,’’ he said.

While he said there had been some inevitable disruption in global supply chains as a result of the pandemic, “we will not see a markdown in asset values and strong demand for agricultural commodities will continue. We would expect to see renewed interest in the asset class when all of this settles,’’ he said.

In Australia Westchester, like some of the other foreign groups backed by pension funds that have acquired rural property in recent years, operates a passive model where it purchases land and leases it back to the farmer.

“We really like the professionalism of the local agricultural sector and the efficiency the farmers have. There is a resilience the industry has, which it has to have to deal with the challenges that come along climatically,’’ Mr Davies said.

“Australia is a destination that we very much like. It is a sophisticated and developed market. It is a good place to do business.”

Earlier this year the federal government asked the Foreign Investment Review Board to examine all property and business plans by overseas buyers to ensure any distressed assets were not sold too cheaply during the pandemic.

Mr Davies said more consolidation in the Australian rural sector was inevitable after a spate of takeovers last year.

Distribution group Ruralco was bought by Canadian fertiliser giant Nutrien — which already owned the Landmark brand in Australia — while Elders made a successful $187m bid for Australian Independent Rural Retailers.

Another Canadian pension giant, PSP Investments, bought Tasmanian agribusiness group Webster.

“Although overall agriculture will fare very well compared to other sectors with the current COVID situation, there is an inevitability that there will be pressures that will come. For example the dislocation in credit markets and the impact on companies. It does mean there will be further consolidation in Australia and everywhere for that matter,’’ Mr Davies said.