The agri-food sector is strategic for the economy and society.
Rural real estate has an added appeal in Spain thanks to favourable conditions such as access to water, proximity to major markets, soil quality and abundant sunshine. The infrastructure in our country and our extensive management experience add value to investments in agriculture, livestock, renewable energy and forestry.
With property sales reaching record levels, demonstrating the health and interest in the sector, it is essential to have an expert risk analysis of purchase and sale transactions.
What is risk analysis like in rural real estate? The role of appraisal and valuation
The role of appraisal and valuation companies in developing reports for the rural sector has gradually adapted. Appraisal regulations, which date back to the 1980s, were originally designed to provide guarantees and reassurance to financiers and are essentially conservative in nature, introducing the principles of prudence.
However, the incorporation of international standards allows greater flexibility to introduce market elements for certain valuations, which in the case of an appraisal cannot always be included.
Thus, when we work for the investment world in the development of valuation reports for mortgage purposes, it allows us to be much closer to the reality of the market and to incorporate certain risk mitigants, as well as market and/or revaluation expectations, which are not always permitted by our national valuation regulations based on the criterion of prudence.
The purposes of valuation and appraisal are different. In a sale transaction, a valuation can be carried out by the owner seeking financing to expand their business and, on the other hand, by investors acting as investment advisors and guarantors of the final value.
What is the impact of ESG on the valuation of rural properties?
The agri-food sector is the only one that, in addition to emitting carbon, also reduces CO2, and a European regulatory framework is needed.
Europe is currently working on how to contextualise carbon absorption per crop and hectare for the generation of credits and thus determine aid to the agri-food sector.
From an investment perspective, it is no longer possible to find interest outside of ESG policy requirements, making investments outside of these criteria impossible.
Although the valuation methodology leaves little room for incorporating ESG criteria, it is possible to include them once the certifications and sustainability criteria for the asset have been obtained.
At Gesvalt, we support our clients by conducting ESG due diligence., with in-depth energy audits, assisting with consultancy on what the needs are. capex that they will have to face in order to achieve these sustainability standards, which on the one hand may be their most attractive asset for investment, or on the other, will earn them points when it comes to financing.
Irrigation aspects assess investments
When purchasing rural land, investors want to control the entire process up to the point of commercialisation. That is why the most common practice when acquiring land for a specific activity or sector is to also purchase the related agri-food industry. For example, orange groves and juice processing companies; market garden or greenhouse land and entry into a fruit and vegetable distribution centre; or vineyards and their wineries.
Therefore, project maturation periods are comparatively longer than for other alternative real estate products. The aspects that investors take into account to mitigate investment risk can be listed as follows:
- Professional cash flow analysis: asset manager approach vs. “as is” valuation approach.
- Improvement in technical management.
- Investment in technological upgrades.
How does risk relate to investment?
The growing demand for raw materials and, specifically, the rise in food prices, are factors that support this trend. Although large companies are not expected to seek immediate returns in agriculture, it is quite possible that this will happen in the coming years.
Growing concern about access to food is creating a new geopolitical landscape around food security, leading many countries to acquire farms and ban the export of their products.
Farmland is a proven hedge against inflationary scenarios such as the current one, as well as having a very weak correlation with the most common investment assets. This is a very powerful argument for reducing risk and improving portfolio performance.
How Gesvalt can assist
We have an exclusive area dedicated to the agricultural sector and rural properties, with close ties to regional, national and international banks.
We prepare valuation reports for rural properties and provide advice on purchase and sale transactions, which are essential for the proper management of real estate assets.