The idea behind Real Estate Investment Trusts is simple: a REIT pulls together income-producing property assets that would usually be out of reach to the average individual investor, packages the assets up and essentially offers the opportunity to buy in to a real estate portfolio.
REITs hold considerable appeal for investors as they essentially provide a liquid stake in real estate – luring those seeking the stable yield and long-term capital growth often associated with property investment, without tying those upsides to a traditional bricks-and-mortar investment.
Australian Real Estate Investment Trusts, or A-REITs, traded on the ASX typically fall into one of five categories – industrial, office, hotel and leisure, retail, or diversified, which includes a mix of all four stand-alone categories.
Agricultural property, and particularly foreign interest in Australian agricultural assets, has earned considerable attention over the past 12 to 24 months – so it’s perhaps surprising that this is an area that hadn’t been associated with REITs.
That changed this month with the successful ASX listing of Vitalharvest Freehold Trust, Australia’s first standalone or non-stapled Agri-REIT. Vitalharvest owns citrus and berry farms in Tasmania, South Australia and New South Wales, which are currently operated by a single tenant.
After deciding to divest the farm properties, Vitalharvest weighed up its options with regard to securing a buyer for the portfolio.
In the Australian market, foreign buyers have accounted for a significant portion of large farm and agricultural property sales in recent years. However, as seen with the decision to twice block Chinese-led consortium bids for the Kidman cattle empire, the Federal Government is sensitive to foreign ownership of large rural landholdings.
That sensitivity was further underscored last year, when Treasurer Scott Morrison announced an update to the Foreign Ownership of Agricultural Land Register and emphasised the Government’s commitment to increasing “scrutiny and transparency in Australian agriculture and foreign investment”.
Most recently, the Federal Government shored up its position by introducing draft legislation to amend a tax concession that allowed foreign investors to access a reduced rate of withholding tax on net rental income received from Australian properties held through Australian Managed Investment Trusts (which includes wholesale vehicles). The concessional rate of 15%, as opposed to a standard 30%, was the result of an initiative introduced around a decade ago that was designed to entice offshore investors such as pension funds to buy into Australian land assets.
While more aimed at the infrastructure sector, it has been used by foreign buyers seeking agricultural assets – and this year, the Government announced agricultural landholdings would no longer be included in the scheme.
Overall, the Government’s stance on foreign ownership of agricultural property means that there will be constraints on the flow of offshore investment capital coming in to this area in the Australian market. By extension, that narrows an already small pool of buyers for large landholdings.
What this means is that owners of these assets will need to look at different strategies where it comes to taking their properties to market – and the listing of the Vitalharvest Agri-REIT will be keenly observed.
On the other side of the equation, Australian investors, from retail investors through to institutions, will also be watching with interest as Agri-REITs open up opportunities in a sector which was previously really only accessible to the very big players with deep pockets.
Of course, Agri-REITs don’t exclude foreign investors. But they do provide them with an opportunity for part ownership of an asset or portfolio, as opposed to a controlling stake, which fits with the Federal Government’s apparent policy objective.
A public listing won’t suit all agricultural landholders, but it certainly opens up the playing field where it comes to disposal of these assets – potentially meaning sellers could pursue a dual-track strategy of exploring an asset sale or the IPO path. This could help revive some of the competitive tension removed by the clampdown on foreign buyers, and even allow several owners to work together to aggregate a portfolio of assets into a single Agri-REIT offering, or to fold their interests into an already existing REIT like Vitalharvest.
With the right support and advice, both investors and landowners could reap the rewards.