An overview of African farmland

The African model could follow a similar pattern to Brazil.

7 May 2013, Words by Ian Bailey

 

Africa offers a significant agricultural investment market but is not for the faint hearted. As ever, it is vital to be focused and as with all investments ‘know your market’. The risks can be substantial but for the well informed there is an opportunity to acquire large productive farms that are likely to significantly increase in capital value over time.

We believe the African model is likely to show a similar, although accelerated, pattern to agricultural investment opportunities in Brazil. 40 years ago Brazil had limited agriculture potential with poor infrastructure and a weak economy. Investment in infrastructure, the availability of credit facilities and policy reform to consolidate land has turned around Brazil into a global hub of commercial agriculture.

For example, the Cerrado region has shown remarkable growth where, soybean output increased from 250,000 tonnes in 1961 to 30 million tonnes in 2011. Farmland values increased around six times between 2000 and 2012.

The easiest way to access the SSA is through the developed markets of Zambia. However, an investor will pay the price for entering into a secondary market – the primary investors will require compensating for the time and capital invested into developing these assets.

The other option is to take advantage of the significant agricultural opportunities in Africa, which requires the investor to develop their own farm from an early or Greenfield stage.

In all cases it is ideal to invest in medium to large scale (being 1,000 – 5,000 hectares). As elsewhere the operations which will allow economies of scale and competitiveness in labour, logistics, mechanisation and sourcing inputs are likely to be most successful.

Investors looking at very large scale tracts of land, in excess of 5,000 hectares, may attract negative government and international publicity as part of an anti ‘land grabbing campaign’.

We recognise this may not be the place for institutional investors who tend to have a ‘low risk’ profile to investments.

Although the market is currently limited, we believe there are opportunities at this early stage to acquire a significant asset for a value that is still currently less than its true net asset value. In these cases, investors can capitalise an asset that in three to five years’ time will hold significant capital value and be showing a healthy income return. As in Zambia, well developed commercial scale farms will attract a premium comparable to the best western market values.

 
 

Key Contacts

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

Hugh Coghill

Hugh Coghill

Director
International Farmland

Savills Margaret Street

+44 (0) 20 7016 3818

 

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