Market and Values

As this report illustrates, the farmland market in Africa is very limited despite the large geographic size and market hype. There are fundamentally two options available to an investor wanting to access this market and in both cases secure land title is essential.

1. Invest in (early stage) projects and develop a greenfield asset (primary market).

2. Source and acquire one of the limited ‘developed’ farms (secondary market). Although the core market is still in its primary phase there is evidence that a secondary market is starting to develop.

The secondary market is a consequence of the original pioneers of commercial agriculture who invested four or five years ago and have successfully developed their farms from Greenfield to fully operational aggregated agri-businesses.

Many holdings are showing a profit and have significant capital value captured in the assets. An example of this can be seen in our case study.

In some cases these successful investors and pioneers are now looking for a full or partial exit to realise the true value of their asset. We anticipate that some of these developed commercial farms will come to the market in the next year or two offering significant opportunities to investors.

In addition there are smaller titled farms available for sale, which are often a result of post-independence family farm development. More evidence of asset values will emerge as the market develops and there is a transaction history for these more developed assets.

Recent comparable evidence in Zambia, where several farms came to the market in 2012, endorses the illustration shown in Graph 3. Due to the lack of comparable evidence from the market, values are often assessed by a combination of comparable profits and residual based valuation methods, which look at the income potential and infrastructure development potential of the farm.

Graph 3 attempts to illustrate this process. This should be used as a guide only as many different factors are interlinked and can give significantly different results but the principle remains the same.

• Base – early stage project presuming suitable soil type, climatic conditions, location, in an area of low population density and NOT situated in an area of environmental importance.

• Improvements to soil fertility and/or livestock genetics leading to improved productivity.

• Improved external infrastructure including utilities (especially power) and transport links enabling transport efficiencies and reduced costs.

• Improved internal infrastructure including roads, buildings and fencing which increase management and labour efficiencies.

• Investment in the latest technology and equipment to improve operation efficiency and timeliness to reduce costs and increase output (crop yield and quality).

• Water management and irrigation to create dry season production certainty.

• Up stream facilities, processing facilities and feed mills to add value to outputs and integrate supply chains.

• Successful integration of sustainable (social and environmental) value chain projects.

Although broadbrush, Graph 3 illustrates the relative amounts of capital required against value uplift and is a key consideration for those making a Greenfield investment.

Investment case

Potential for significant crop yield increase

The farmland investment market is immature in SSA and hence it is very difficult to source reliable data on investment performance (income yields and capital appreciation). However, information derived from our experience shows that:

Typically, investment returns based on net cash flows for Internal Rates of Return (IRR) are between 8-25% over 5-10 years. These will depend on the enterprise and location, and the level of capital required to develop the farm to full operational capacity. External infrastructure and access to markets are key to maximise income return. Entry costs will be high if buying an existing operational asset but that will reflect on the level of return.

It is difficult to disseminate figures for capital appreciation as it is fundamentally related to infrastructure development. Our experience and evidence suggests that capital growth can range between 10% and 30% in the first five years but this is highly variable and growth is very specific to individual farms and markets.

Once up to full strength (in year five or six for a Greenfield asset or year one for a going concern) a commercial farm should be returning an annual net yield of 20-25% based on EBITDA against capital invested and or likely capital value. The first two to four years are likely to show an annual loss depending on how quickly the farm is scaled up.

The investment period should be over 10 years, with seven years the absolute minimum. The exception to this is a capital value play of acquiring an asset, improving it through capital development and then selling in a strong market for capital plus a premium. Returns here, as a developer would expect, are likely to be 10-20% per annum depending on strength of demand and quality of the improvements.

Taken from
Spotlight: African Farmland