Q&A with Rural Funds Management David Bryant

With $2.4 billion in assets under management across 67 properties, Rural Funds Group boss David Bryant spills the beans on investor appetite for ag.

Rural Fund Management's David Bryant sits down for a Q and A with The Weekly Times for AgJournal.

Rural Funds Group is an agriculture bohemeth with $2.4 billion in assets under management spread across 67 properties in five states with a focus on almonds, beef, cropping, macadamias and vineyards. CONOR FOWLER sits down with managing director David Bryant to discuss the opportunities and challenges for investors.

David Bryant, in the last 12 months and since the pandemic, what has the investor appetite been like for agriculture?

Three years ago, people thought interest rates would stay very low for a very long time. Since then, it’s become clear that interest rates are actually going to be higher. They have increased substantially and people also have the view that interest rates are going to be higher for quite some time, and that has curtailed interest in investment in agriculture. So I think institutional investors are more cautious. They’re still active but more cautious, and I think family farmers are still active but more cautious, because in their case, they’re looking at the cost of debt versus the income that they can generate on the farms, and they’re finding that the returns are negative because of the increased cost of debt.

How do you manage higher interest rates and caution from investors as a business?

We see it is a cycle. So some of it is about waiting for rates to go down, but the other part of it is being active with the portfolio that you have. So we’ve got some assets that we’ll put on the market to sell at the moment, because they’re generating returns that are not particularly high, but we know that they’ll be attractive in other people’s hands. And then we continue with developments that we have underway. We’ve got about $500 million of development underway between macadamias and cotton farms, so we keep progressing those developments and that will increase the returns that we can generate in our portfolio. So it’s a matter of making sure you’ve got every asset working for you, generating what it can, and if it’s not a satisfactory return, we will sell those assets or else develop them to get the returns that we need.

In terms of investor appetite, are you seeing more foreign or domestic interest?

There’s very little investment activity from Australian superannuation funds. The reason for that is that they differ in nature to many of the foreign pension funds that are active here, and that’s because the Australian superannuants have portability. They can take their superannuation and move from one fund to another, take their member account balance and move about. So the Australian super funds require a greater degree of liquidity because of that aspect of portability. Whereas the offshore pension funds that are investing in Australia, they are what’s called defined benefit funds. They’re generally employer/employee funds. So it’s somebody that might work for a fire department in the US or Canada, or they might be a policeman or a teacher or something like that, and those people are told by their employer, “you have superannuation, and it’s a pension that will be at a certain amount of your income for the rest of your life, indexed with inflation”. So those funds have that member there for good, for life and so they’re making investment decisions over a much longer time frame. And so they are the dominant foreign investor in Australian agriculture. The dominant domestic investor in Australian agriculture is the family farmer, and then people like ourselves would be the sort of next largest investor group where we have Australian investors, predominantly Australian investors, invested in our fund. My guess is a third of the investment in Australian agriculture is offshore at the moment. It’s not 1/3 ownership, but of new assets being acquired, my educated guess is that it is one third.

In the past few years you have undertaken a shift in strategy to ‘natural resource predominant’ assets. What were you identifying at the time that led to that shift?

We think that what our investors want is a reasonable income, but with some growth in that income. Now, if you’ve got natural resource assets, you’ve got an asset base that’s growing in value, and then that actually means you can receive more rent or operating return from that asset. Whereas if you’ve got infrastructure heavy assets, you just need to be aware that you might have a higher rate of income, but you’ve got to actually keep putting capital back into that infrastructure to make it sustainable. So in some ways, we think that the high headline rates of income from infrastructure assets are overstating the real returns that they can get.

Will the change in ESG reporting requirements for farmers change anything from your point of view?

At this stage we don’t think that there’ll be any detrimental change, because it’s not mooted to impose a cost on Australian farmers. I think that there’s talk of reporting the emissions, but there’s not talk of imposing a cost. I think it’s still too early to see when Australia, or any other country for that matter, is going to venture down the path of imposing a cost on food production. On the other side of the ledger is the ability to generate carbon credits from vegetation management and that type of thing. We’re expecting there’s probably going to be some improvements to the methodologies there that would impact some of the value of our assets, but it would be not material. One or two assets would probably become more valuable because of that, but as a rule, most of our assets are not really suited to generating substantial carbon credits.

What are investors looking for in a company they want to invest in such as yourself?

What they’re looking for is sustainability, and that’s sustainability of investment returns first and foremost. But I think most investors and ourselves, and myself included, feel that our farming practices have to be sustainable in order to sustain investment returns. So I think investors like myself are very pragmatic about sustainability, that it is non-negotiable, and there is an investment motivation in ensuring that our farming practices, or those of our lessees are sustainable.

Is there any new sector that RFM is looking to divest into? Or a sector you think could play a major role in the next decade?

We’re always looking at new sectors. And if there was a sector that we had a high conviction about, I wouldn’t tell you until we were set. I mean, we’re pretty preoccupied actually, with the large developments we’ve got on at the moment. We’ve got a lot of confidence in the outlook for the macadamia sector and the cotton sector. We think Australia is a world class competitor in those two sectors, and that’s where we’re quite preoccupied in those two sectors at the moment. So they’re the ones we really see quite immediate growth in, but we continue to look at other sectors where we think Australia has a comparative advantage.