Record purchases of agricultural land in Europe - Portugal has great potential.

A new type of business has emerged in the national marketplace. The acquisition of agricultural and forestry real estate is growing rapidly around the world at a time when investors are increasingly looking to combine competitive financial returns with positive social and environmental impacts. Europe, especially Western Europe, attracts the most investment in this segment, with €5.3 billion raised in 2023, triple the results of the previous year. Portugal and Spain have been among the most active countries in attracting investment in agricultural and forestry real estate and have the potential for further growth.

Investment in agricultural and forestry assets is growing worldwide. So far, €10.2 billion has been raised to invest in these properties so far this year. More than half of this capital was invested in forest and agricultural land in Western Europe. It is worth noting that in 2022, only 27% of capital was invested in the Old World West.

In this context, Portugal occupies an important position. Data from the Nature Capital market study conducted by JLL and Consulai (an agricultural consultant) also shows that the Iberian Peninsula is one of the markets that is contributing to the growing attractiveness of Western Europe. And in the future, Portugal and Spain will benefit from this flow, so that investment in the sector will continue to surpass €1 billion by 2024. Why is Portugal attractive for buying agricultural and forestry real estate?

Although Portugal is just starting to invest in agricultural and forestry assets, research shows that we have "high growth potential" and the opportunity for deals in excess of €500 million in the next two years.

This is confirmed by Gonçalo Ponses, Head of Development and Natural Capital at JLL: "Portugal is in an excellent position to get a share of this capital invested in forestry and agricultural assets. Judging by the interest of investors, within two years the turnover in this sector could exceed 500 million euros in our country. "

But why does Portugal have the potential to attract such real estate investments? "

Pedro Santos, CEO of Consulai, explains that "Portugal's good position is due to the huge potential that has not yet been realized in these areas, as well as the excellent natural conditions for these activities and the different competitive advantages in terms of factors and costs of production. "

There are several advantages that Portugal offers for investment in agricultural and forestry assets:

• favorable climatic conditions;
• fertile soils;
• water availability;
• possibility of producing a variety of crops, from olive trees to berry crops, nuts and grapes;
• more competitive asset prices compared to other markets;
• Relatively low production costs compared to other regions;

These factors "combined with a growing market (...) make our offer very attractive for those who want to invest in the natural capital sector," also says Pedro Santos of Consulai.

Agriculture and forestry in Portugal: what culBusinesses are also thriving, with agricultural exports up 2.1% from January through October 2023 compared to the same period last year, while total exports declined 1.0%. It is worth noting that Portugal is the world's top five olive producer and one of the largest wine exporters, and there is still potential for expansion.

There are several reasons why investors are now turning their attention to agricultural and forestry real estate. "The trend of investment diversification coupled with sustainability requirements is attracting investor interest in assets that underpin agricultural and forestry activities. In addition to interesting and stable returns and an attractive level of risk, this investment plays an active role in carbon sequestration and has a positive impact on the environment and society. That's why more capital is being allocated to such properties," explains Gonçalo Ponces of JLL.

What seems to be a trend in the market is a willingness to accept a lower valuation rate while reaping greater environmental and social benefits, as some investments in agricultural and forestry properties are "motivated by a genuine concern for the planet and society," the report states.

"We are talking about a very interesting return on the level of risk that is associated with most of these investments, and this is one of the reasons why more and more investors are attracted to it," notes Gonçalo Ponces. "But it's also because of the positive impact of these investments. First, on environmental sustainability, as agricultural and forestry assets are capable of carbon sequestration and can play a very important role in offsetting emissions, which is very attractive to investors in light of increasingly stringent decarbonization requirements. We will see more and more activity in this sector," he concludes.

With regard to yields, in this area, the returns required by investors can vary depending on the contract terms in each individual market segment, the stability of the water supply, the age of the biological assets, projections of future costs and revenues, and the characteristics of the property and its location.

This means that returns (return on investment) can vary widely between agricultural and forestry businesses. For example, for investments in established permanent crops (with owner-managed or management contract), investors typically expect an annualized return of 7% to 9%. While planting and new development investments require an internal rate of return of 10% to 14%. Of course, lower-risk farmland investments (e.g., non-irrigated fields and forest) also offer lower annualized returns of 4% to 6%.

What seems to be trending in the market is a willingness to accept a lower appraisal rate when receiving greater environmental and social benefits, as some investments in agricultural and forestry properties are "motivated by a genuine concern for the planet and society," according to the report.

"We are talking about a very interesting return on the level of risk that is associated with most of these investments, and this is one of the reasons why more and more investors are attracted to it," notes Gonçalo Ponces. "But it's also because of the positive impact of these investments. First, on environmental sustainability, as agricultural and forestry assets are capable of carbon sequestration and can play a very important role in offsetting emissions, which is very attractive to investors in light of increasingly stringent decarbonization requirements. We will see more and more activity in this sector," he concludes.