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From farms to industrial sites, raw land is proving a hot investment across the Western prairies

BY FRANK O'BRIEN/GEOFF KIRBYSON

In Fort McMurray an acre of industrial land sells for more than $1.2 million per acre. In Vancouver, it can cost the same for a 33-foot-wide home-building lot on the west side of the city. In Manitoba, a surprising shortage of commercial land has driven city prices up to $800,000 an acre. But, across most of regulation-laden Saskatchewan, a million dollars - or even less - could buy 1,000 acres of some of the world's most productive farmland.

This is among the reasons why farmland is looking like the smartest investment, and it has drawn a number of hedge funds, limited partnerships and other investment vehicles to the market.

The average price of Saskatchewan farmland increased 11.6 per cent over the past year - the highest average increase in Canada. This follows gains of 2.7 per cent and 2.9 per cent over the previous two years.

The price acceleration began in 2003, when Saskatchewan changed the rules to allow Canadians unlimited ownership of farmland (out-of-province buyers had been restricted to owning 320 acres. Restrictions still apply to foreign owners). Since that time the average price of Saskatchewan farmland has doubled.

An example is Prairie Merchant, the Calgary-based company controlled by former Dragon Den panellist Brett Wilson. Last year Wilson's company bought 394 acres in Strathmore, Alberta, where it plans to build up to 1,700 homes.

"I see farmland as a good investment in several ways," Wilson told Western Investor. He first began buying in Saskatchewan as the ownership rules were being relaxed.

"Because the buyer pool had been restricted for so long the market values for land in Saskatchewan had been depressed, effectively by government intervention," Wilson said. "I still see Saskatchewan farmland as a long-term hold - with a limited supply of good, arable farmland and ever-increasing demand for food on a global basis."

While Wilson has focused his farmland investment strategy in Saskatchewan, he owns farmland and ranch land in both Alberta and Saskatchewan.

Prairie Merchant is not alone in seeing the potential in Prairie farmland. Other investment firms that are involved in the purchase of Canadian farmland include Calgary-based Agcapita, which is holding about 60,000 acres of Saskatchewan farms; Assiniboia Farmland; Bonnefield Financials Inc. (new in 2010); Hancock Agricultural Investment Group, a division of Manulife Financial Canada, which is already managing $1.3 billion in agricultural real estate in the U.S.; Sprott Resources Corp. operating One Earth Farms, which is mainly focused on renting First Nations land; and HCI Ventures Inc. owned by the Hokanson family from Alberta.

While all of the farmland investment syndicates seek opportunities in Western Canada, Saskatchewan appears to be the primary focus - and one of the reasons farmland prices are rising in that province.

Restrictions

Saskatchewan continues to restrict foreign ownership of farmland, a move that, though intended to protect farmers, according to a study by Bonniefield Financials may be having the reverse effect. David Sparling, chair of agri-food and innovation regulation at the Richard Ivey School of Business (and chairman of Bonnefield Canadian Farmland Corp.) compared data from Saskatchewan with those of other provinces found in the 2006 Census of Agriculture.

The study found that, between 1986 and 2006, Saskatchewan saw the number of farms in the province fall by over 30 per cent compared with a decline of 14 per cent in Alberta and a national average of 21 per cent. The only province to experience a similar decline was Manitoba, where a regulatory environment similar to Saskatchewan's is in place. As well, over the past 20 years, the number of acres of Saskatchewan land owned by farmers declined by 5.3 per cent, compared with 0.8 per cent and 3 per cent declines in, respectively, Alberta and Manitoba, the study found.

Foreign buyers

The Holy Grail of Saskatchewan farmland investing, in reality, is the opening up of Saskatchewan farmland to foreign investors. It is estimated that the amount of global farmland that has been acquired by foreign entities equals about 198 million acres. There is $100 billion waiting to be invested by 120 investment groups, says a study by U.S-based agri-consultants HighQuest Partners.

Major buyers are countries in the Middle East, China, Japan, South Korea and Western Europe.

In the last three years China has bought 7.5 million acres of farmland, mostly in Africa. Saudi Arabia has spent $800 million on overseas farms and is looking for more in Africa, Argentina, Australia and Eastern Europe. Japan is also buying huge farms in both Africa and South America.

Data collected by the U.S.-based International Food Policy Research Institute shows that, in 2010, governments bought nearly 10 million acres of farmland in foreign countries, an area bigger than Belgium.

Politically secure and economically safe Canada would provide an ideal farmland investment, but the country allows provinces to set the rules on farmland ownership. On the prairies, only Alberta has no foreign ownership restrictions. B.C. has no foreign ownership rules, but its Agriculture Land Reserve keeps most agriculture land as farms.

Still, farmland has proven a rock-solid investment.

According to a study by Enquirica Research, Canadian farmland has seen a 10.6 per cent increase in returns over the past 10 years, compared with 3.8 per cent for the Toronto Stock Exchange Index. The Enquirica study says that by renting out farmland to real farmers, "a Canadian investor in farmland can look forward to reliable cash-flow on the order of 6 per cent to 7 per cent, without operational risk."

Farmland values are not only rising in Saskatchewan, they have increased across the country, according to Farm Credit Canada, and are posting double-digit increases in the U.S.

According to a recent report on farmland values in Kansas, the average value has soared 25 per cent in the past 12 months, from an average US$3,000 per acre to US$4,000 per acre. Double-digit annual increases in land value were common this past year across the Corn Belt region of the U.S.A.

110,000 acres

Assiniboia Farmland Limited Partnership is one of the big players in Saskatchewan. In the past seven years, the partnership has accumulated about $50 million in investment capital, according to company co-founder and vice-president Brad Farquhar.

"We now own approximately 110,000 acres of farmland across Saskatchewan already worth about $100 million. The land is leased to more than 140 active farm tenants and we have a solid history of gains and cash distributions. We have a goal of growing to about 400,000 acres in the next three to five years."

Assiniboia's strategy is simple and not unique to the investment strategy used by other farmland investment groups.

"Our strategy is to buy land without overpaying, rent the land to farmers, collect the rent and pay the bills and then distribute the surplus cash to investors," Farquhar said.

About 95 cent of Assiniboia revenue comes from land rent, but the company also generates revenue from oil and gas surface leases, carbon credits, gravel sales, subdividing and selling residential acreages.

The exit strategy is to liquidate the land holdings in a limited partnership within five years of the purchase.

"We are primarily focused on farmland in Saskatchewan as it is still undervalued relative to neighbouring jurisdictions," Farquhar said.

In Saskatchewan, farmland prices are also rising because of larger local producers expanding their land base and the oil and gas influence, especially in the Bakken oilfields around the Estevan area.

Beats the TSX

Investment syndicates buy Saskatchewan farmland at an average of $550 per acre and rent it to operators at an average of about $33 per acre. In prime areas, recent prices and rents have been two to three times higher.

Here some of the reasons investors are eyeing Canadian farmland, especially in Saskatchewan, according to Agcapita:

- Low Volatility: Farmland prices exhibit low volatility in general and in particular when compared with listed equities.

- High Absolute Returns: Farmland typically generates higher absolute returns than listed equities on the Toronto Stock Exchange over most measurement periods.

- Emerging Market Linkage: As emerging markets develop, the consumption of energy and agriculture commodities increases rapidly (for instance, more sales of wheat and beef).

- Cash-flow: By cash renting (i.e., leasing the land to farmers for 100 per cent upfront cash payment rather than operating) an investor in farmland can look forward to reliable cash-flow without operational risk. In addition, as cash rents tend to track land prices with a lag, farmland rental cash flows tend to be inflation hedging themselves.

Saskatchewan farmland trades at a discount to global averages Saskatchewan price increases over the last 4.5 years (the period over which Saskatchewan farmland prices began to accelerate) go a long way to bearing out the existence of this "margin of safety"; Saskatchewan farmland returns (2007 to present, excluding rents) equal to 11.4 per cent per year.

Manitoba

In Manitoba, it is not farmland but industrial and commercial land that is drawing attention due to a looming shortage. That can only mean one thing, experts agree - prices are on the rise.

Martin McGarry, president of DTZ Barnicke Winnipeg, said land for commercial development is very hard to find. At a minimum, shovel-ready sites are fetching $20 to $25 per square foot, or about $800,000 an acre. 

"Most of the valuable commercial land is owned by developers. If you want to build your own building, you have to lease from a developer. If you want to buy the land, it's pretty tough with shovel-ready lots," he said.

It's much the same situation with the industrial side of the market, where serviced land is difficult to come by in the right size or location that developers often want, despite what appears to be endless land to an outsider.

"The vacancy rate for leased and owned premises is the tightest I've ever seen. There's more pressure for somebody new to the marketplace to build and then they've got to find land. The market just keeps getting tighter. It's getting a bit ridiculous," he said.

Tom Derrett, an industrial sales and leasing agent at Colliers International, agrees. People often think of Winnipeg as having nothing but land, but the truth is there is a severe lack of serviced land inside the Perimeter Highway for industrial development, Derrett noted. "Anybody looking for land is being forced to get further away from where they used to be," he said.

Land closest to the airport is in the highest demand. Depending on the location, the prices are ranging from $150,000 to $250,000 an acre, he said.

"You've got different price points. You might have land across the street from another parcel, one is serviced and one isn't. It's not so much the supply and demand, it's the cost of servicing the land that's driving the prices up," he said.

The situation isn't nearly as extreme on the residential side, but that doesn't mean it's not strong. Shirley Przybyl, president of Winnipeg Realtors, said the housing market has made a habit over the past decade-and-a-half of outperforming forecasts, and things were no different in 2011. She expects increased pressure on land prices as developers seek sites, particularly in the capital city region.


from Western Investor April 2012

 

 


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