Investors with money in shopping centres and commercial office sites are switching their attention to farms and water as the coronavirus pandemic takes the gloss off metropolitan real estate returns.
West Australian-based real estate investment trust management group Primewest is poised to expand its recently acquired stake in Vitaharvest's east coast horticultural holdings, and buy other farmland.
The 25-year-old listed Primewest group manages about $4.5 billion invested in 84 different funds, including $1.5b in office buildings and $1.1b in neighbourhood supermarkets and related shopping precinct developments.
Shopping for farms
Last year it made its first foray into farmland, buying about 400 hectares of country on Victoria's Mornington Peninsula and 300ha at Deniliquin in NSW's western Riverina.
Then in June Primewest bought a 12pc stake in Vitalharvest, the company which owns land and infrastructure leased by big horticultural producer and wholesaler Costa Group to grow citrus, berry and avocado crops in Tasmania, NSW and South Australia.
It also acquired the management rights to Vitalharvest's landholdings and is expected to lift its ownership stake in the company to about 20pc, and eventually rename the listed business Primewest Agri.
Several more properties are now being considered for purchase.
We're not restricted to any specific locations, but we need access to irrigation water
Perth-based Primewest managing director David Schwartz said some of those horticultural assets were identified by farmers wanting to expand their existing operations by renting extra land.
Other options for Primewest included buying horticultural, or possibly broadacre grain country, and leasing it back to its current owners.
"We're not restricted to any specific locations, but we need access to irrigation water," he said.
"The past year has highlighted the value of water.
"If you don't have water reliability you don't have production reliability."
Primewest was not too choosy about its commodity profile plans either, with Mr Schwartz saying the company's buy to rent strategy could encompass vegetables, stonefruit, table grapes or almonds.
Its recently acquired farms in southern Victoria and southern NSW grow leafy vegetables and carrots.
"We're focusing on intensive horticulture, but will look at grain growing farms if we have a counterparty farmer who is looking for a capital partner," he said.
"However, I don't think livestock ventures will be on the cards, at this point."
While agriculture was only a recent attraction for Primewest, investors were seeking more alternatives to commercial real estate particularly in the wake of this year's coronavirus pandemic.
Commercial office and retail space was likely to experience a significant slowdown in demand and rental return as more people worked at shopped home.
"Investors are uneasy about COVID and the impact it will have on real estate, but demand for productive farmland and water is continuing to be strong all around the world - everybody's still eating," said Mr Schwartz, who migrated to Australia 32 years ago from South Africa where he had some farming connections.
"We believe the agricultural sector will outperform other real estate investment classes in the current environment."
The transition to owning and leasing out farmland had so far been "very easy", although extreme drought, high water prices and reduced yields from Costa's crops gnawed into Vitalharvest's earnings in 2019-20.
"The principles of owning farmland are much the same as property," he said.
"We don't have to be farmers ourselves, but we provide the assets to enable real farmers to get on with their job without having to buy the land themselves."
Skin in the game
However, the company retained some sharefarming "skin" in the productivity game.
Vitalharvest's 10-year lease deal with Costa Group includes taking a 25pc of the pre-tax profits generated from the land.
Drought, bushfires, water costs and poor quality fruit-set on several Costa properties cut the trust company's full year revenue by about $1m to $14.3m last financial year.
At Corindi on NSW's North Coast the blueberry operation literally ran out of water, while at Tumbarumba in the south fruit was lost to fire and smoke damage.
Net profit to investors from Vitalharvest's funds from operations fell 16pc to $8.8m and dividends were cut for 1.7 cents a share last year to 1.5c.
Mr Schwartz expected significantly better results this year because fruiting conditions were more favourable, trees more mature, water prices more realistic and a 900 megalitre dam had been constructed to reduce future water supply risks at Corindi.
"Everything that could go wrong did go wrong last summer.
"But we've now focused on improving water reliability, and improved climatic conditions may have a positive influence on production."
- Start the day with all the big news in agriculture! Sign up below to receive our daily Farmonline newsletter.