Friday Letter Betting the farm

For savvy entrepreneurial firms, real estate offers cavernous opportunities to respond to global economic trends.

Take agricultural land, for example. While the value of traditional real estate asset classes plummet in many established markets, prices for farmland keeps on rising.

In recent months, some nimble-footed investors have been keen to take advantage of the trend. BlackRock, Macquarie Bank and Paris-based Pergam Finance are examples of those actively raising and investing capital to deploy in certain countries.

And as PERE.com’s sister site PrivateEquityOnLine discovered this week, another name can be added to the list: Dexion Capital. The London-based firm is hoping to raise $270 million (€172 million) for a newly-created company, Global Farming, which plans not only to make land acquisitions and disposals but to become the lowest cost producer globally in the cropping and livestock business. The firm highlights areas as far apart as Uruguay, Russia’s central “Black Earth” economic region and New South Wales in Australia as fertile places to invest.

In his open neck shirt, cotton jacket and chinos, Global Farming’s chairman Peter Hannen is not exactly the stereotyped London-based real estate speculator, but he is certainly part of a growing breed tapping agricultural land. The former Merrill Lynch sugar trader believes himself to be one of the largest goat farmers in the world via massive landholdings in Australia, and he is contributing his expertise in farming and natural resources to the new company being created.

What is clear is that there are certainly some challenges to be aware of: drought and areas where governments heavily subsidise farming are two obvious things to watch out for. Scale is a pre-requisite too: to be economically viable, Hannen said one man needs to look after as many as 10,000 sheep, for example.

But with the right strategy, investors are hoping to ride the back of several trends contributing to rising land prices. Not least is the increase in global food prices coupled with predicted global population growth. The United Nations forecasts an increase in the world’s population from 6.6 billion to more than nine billion by 2050. In addition, wealth in emerging markets is driving demand for protein, while expanding energy consumption is pushing countries to look for renewable energy sources such as biofuels which are now competing for agricultural land and produce.

For the potential investors in diversified agricultural funds and companies, it is the stability of returns that are whetting the appetite.

With so much doom and gloom in the mainstream financial press about falling house prices, wide spread job losses, and weakening economies, it is heartening to know there are always fresh areas to explore for the nimble and the brave. Worth bearing in mind next time a real estate broker whinges about softening office rental markets in London.