The cornerstone of agriculture equity is in the land. This equity increases as the productivity of the soil increases, as the profitability of the farmer increases and ultimately, as demand increases for access to the limited resource of profit-generating farmland in the region.
The market is changing fast in 2021, land in Portugal is slowly becoming discovered, and competition is growing. Commodity prices are continuing to grow, with organic commodity demand growing ~30% faster. The Portugal and European markets are still net importers for many commodities suggesting a continued increasing demand for local sourcing.
Here at Pela Terra, our interest is skewed towards the almond production market, where Portugal has been a late entrant compared with neighbouring Spain. Local land prices are still playing catch up – essentially offering an arbitrage trade. We expect that gap to close over approximately 24 months when crop driven profits will stabilise in the region, and land prices may settle into more relaxed appreciation. And that’s part of the reason why this is a good investment opportunity.
But let’s get into more details about how this works.
Soil is improved by increasing the flora, fauna and organic carbon in the system. A more biodiverse and nutrient-rich soil system allows plants to grow faster, with greater resilience and produce a vastly more nutritious fruit. A healthier system also requires less inputs and provides a higher average yield – a double whammy for revenue.
After purchasing, we install infrastructure – much of which is missing from land in the region. These changes increase access to water, improve drainage, and ultimately allow farm operators to generate a higher crop revenue.
Land rental prices are correlated to crop revenues. These upgrades we can make to the land mean a farmer can generate a greater profit – a beautiful example of reaping what we sow, as greater profits support higher rental income.
What makes farmland a low-risk, high-return asset?
Many assets out there depreciate without continuous spending on maintenance to hold their value – homes, offices and factories are examples of this. Farmland, for the most part, does not require maintenance, only proper management during farming. When farmed sustainably the value increases because the soil becomes healthier.
The risk is low with farmland for many reasons:
- Crop Production will double: Let’s start with a huge one; humans require crop production to double over the next 30 years due to rising population and rising demand per person (thanks to reduced poverty and growing middle classes).
- Low Volatility: Volatility is a massive risk factor for any investment. Farmland simply doesn’t boom and bust in the same way other investments do. A factory’s profits depend upon the whims of its customers and the economy – investors learn to live with the ever-present dread of the end of any given boom cycle.
Demand for food is insulated from these economic cycles, hence the lack of correlation between farmland and other real estate types. Whatsmore, a diverse, sustainable farm can further fortify itself by spreading bets over several crops.
- Land is resilient: Natural disasters destroy buildings. The same disaster might wipe out a year’s crop on a farm, but the land is still there next year.
- Higher Returns: Returns from farmland are higher because it’s a limited asset – “they’re not making it anymore” (as Mark Twain famously quipped). In any given region, large firms are buying up the land, understanding the profitability and stability of the opportunity. This increasing scarcity of the asset is consistent with a rising tide of value per hectare, particularly when coupled with the growing demand for the produce of the land.
The prospects of the Portuguese farmland
- Based on current prices we expect land to increase 20-40% over the next 10 years
- Current rent for farmland we are acquiring is 4-6% annually
- Converting land to organic has the potential to increase rent by 20%, and land value by 25%
- Leveraging land investment could increase all figures by up to 2X
The uniqueness of the portuguese farmland
Portugal is lucky enough to have a variety of climates that support the growth of a wide range of crops from apples and asparagus, to almonds and avocados. This climate empowers Portugal to be more self-reliant in ways that other regions can’t.
The challenge is the average age of farmers here is now over 65 and the next generation isn’t interested! A slow adoption of modern farming techniques across the country means that family farms are non-profitable and very hard work. The next generation have fled to digital industries and they’re not coming back. Portugal has also been hit hard through different economic recessions meaning farm infrastructure investment has been neglected.
This all gives rise to opportunity. Low profitability for traditional farms, muddy bureaucracy, and an extremely opaque land-resale market makes it all but impossible for outsiders to find and close land good deals – hence, the land remains undervalued. Like-for-like farmland in Spain is 25% more expensive.
The Portuguese government recognises the need for infrastructure investment. 10 years ago they created Europe’s largest man-made reservoir by flooding an entire valley, licencing predictable irrigation across over 120,000 ha. This created an inflection point for farming in Portugal which is currently a net importer of many food products.
Thanks to our network of land owners, we’re well placed to identify, evaluate and purchase premium (irrigated), undervalued (compared to Spain) conventional (poorly managed soil) farmland. By converting it to organic we begin the process of nursing the soil back to full health, as well as allowing growers to command a premium price for a premium crop.
Growing within Portugal also brings an immediate saving on logistics. For example: the EU imports over a billion euros of almonds from the USA annually. Almonds grown in Portugal hold the same commodity value as their Californian counterparts. But we can save on shipping, handling and tax costs which represent a 17% inefficiency for US product.
Is it a good time to invest?
It’s a really interesting time to invest for a number of reasons:
- Land is still undervalued but not for much longer
- Climate change will create new carbon markets in the ag space
- Growing demand for organic commodities
- Large technological leap in farming sustainably, mainly coming from greater understanding of biological systems.
- Possible inflation may devalue other assets
An insider’s perspective on evaluating Portugues Golden Visa funds.
You, the investor: As a first step, assess your risk:reward appetite. Some prefer a lower risk and are willing to accept a lower return, simply ensuring your money is protected while it earns you a European Passport. Others will seek more of a gamble to try to generate increased profits and Citizenship simultaneously. This calculation is the first step for any would-be investor.
Them, the fund: Due diligence of the fund is imperative. Areas of analysis should include industry, market trends, returns, key individuals, fees, duration and exit strategy. Also – on a basic level – does the investment strategy make sense? Has it been done before, and area conditions similar enough that it’s likely to work again?
The insider perspective:
The fact is that funds in Portugal have grown out of a Real Estate sector which was booming between 2014-2019. Many professionals have cut their teeth in a market where you couldn’t lose.
Naturally, we’re left with a certain number of opportunistic operators with several “successful” projects under their belt. In addition to hard due diligence, unscrupulous operators can sometimes be detected using the good old-fashioned smell test. Ensure you’ve been provided with sufficient detail and then, crucially, dig deep by yourself. Do the details of this project feel objectively right, or are you buying into the individual?
One-by-one through the due diligence:
Industry & market trends: What is the volatility of this asset like? Where are we in the cycle? We know assets like real estate, stocks and bonds boom and bust.
Does the strategy of the fund allow for measures to even out these peaks and troughs? You do not want to be caught in a trough in 6 or 7 years time once you have completed your Golden Visa program. This will leave you a very undesirable choice of leaving your money in, or extracting it at a loss.
No investor needs to make that choice if you avoid the pitfalls.
Returns & Fees: Funds in this market make big promises on returns. Does the maths stack up? Unfortunately it’s commonplace for funds to fall short of their promises. So it will pay to ask exactly how they arrived at such numbers, and crunch the numbers for yourself.
Be sure to request the management regulations document, where you will find the small print on fees and how they might change over time. A one-time subscription fee is normal. Annual management fees are often dynamic, depending on the size of the raise. So, ensure you have properly understood what the fund will charge you. Comparing sevel funds across the market will give you a sense of what is acceptable.
Key individuals: Each fund will have the fund manager – who ultimately has fiduciary responsibility for their investors – and then a fund promoter, accompanied by a number of partners, who will execute activity closely related to the fund’s investment strategy. That team is just as important as the fund manager. Ensure you understand them and their motivations for working on this project, as well as where the experience on the team is coming from.
Duration: the Portuguses Golden Visa program is, on paper, a 5 year process. In reality, all Citizenship by Investment programs across the world take additional time to engage with immigration ministry and navigate government systems. In Portugal, we spend between 6 and 7 years. After that time, most investors want their money back. Large questions should be asked of GV funds with a life span longer than 7 years (or 8 at a push), as they may keep your money longer than suits you.
Last but not least…
Exit Strategy: So a fund has invested your money, you’re 7 years down the road, you have successfully been awarded your Portuguese passport, and you would like your money back please! This requires the fund to liquidate assets, which should be a smooth process, but only if they can fund a buyer!
Examples where this could be tricky include large buildings, with a small pool of buyers who can afford them. This risk can be dramatically compounded in markets which boom and bust. If the sector is looking attractive, that asset might sit on the shelf for years. Ensure you have a clear understanding of how they’re going to shift assets at a time when all their investors will want their money out at the same time.
Introducing the Pela Terra Farmland Fund
As the name suggests, we invest in farmland. The world’s most consistently yielding asset low-volatility. We know all of the above when we designed this fund, and it’s been built with you in mind.
We hear from investors all the time what a great comfort it is to know that their entire investment is asset backed and not going anywhere, and that it’s insulated from boom and bust cycles. Once you’re a fund investor, you’re invited to come and walk on the land with your own two feet.
We utilise generations of farm operator’s experience to sustainably grow produce in Portugal, maximising soil health and profitability of farms. Ultimately, though, our income comes from consistent rental income from those partners. This means income starts flowing in from day 1 and can be projected over a 25 year period, thanks to long lease agreements
Our exit strategy is to sell these assets with those same tenants in place. We always ensure our tenants have first-right-of-refusal, but the assets are also hotly sought after by longer term investors – pensions funds and family offices looking for sustainable, steading investments. We’ve been fielding calls from potential buyers since before we even officially kicked the project off.
Our fund is a 7-year offering, designed to ensure investors can complete their Golden Visa application, but needn’t keep their money in any longer than needed.
We’re available to speak more about the process, or to directly help you obtain a Golden Visa with peace-of-mind here in Portugal.