Factors such as COVID-19 and the Russian-Ukraine war have highlighted the importance of both domestic and international food supply chains for national resilience and, in doing so, catapulted the matter of food security to the top of the political agenda.
However, the matter of food security is a complex and multi-faceted issue to address, with self-sufficiency in food production not necessarily equating to food security. In December 2021, the Government published a UK Food Security Report (UKFSR) in which it stated that it viewed food security to be structured around five principal themes “each addressing an important component of modern-day food security in the UK”:
- Global food availability;
- UK food supply;
- Supply chain resilience;
- Household-level food security (dealing with matters of food affordability, access to food and food safety); and
- Consumer confidence (which deals with food crime and safety issues).
The UKFSR was followed by the publication of the UK’s Food Strategy in June 2022 which committed, amongst other measures, to publishing a Land Use Framework in 2023, “to ensure we meet our net zero and biodiversity targets, and help our farmers adapt to a changing climate, whilst continuing to produce high quality, affordable produce that supports a healthier diet”.
In the context of real assets, the investment theme of food security sits at the intersection of the natural capital, real estate and infrastructure worlds and stretches across a breadth of UN Sustainable Development Goals. Food focused real assets strategies to date have primarily been focused on farmland, cropland or rural infrastructure related investments (such as rural roads, mobile networks and processing facilities). However, as identified in our recent Operational Real Estate report, emergent sectors such as cold storage and vertical farming are becoming increasingly defined real estate investment sectors in themselves.
Vertical farming is the practice of growing produce in vertically stacked layers indoors in order to increase yields while using relatively small plots of land. Vertical farms typically employ technologies such as hydroponics (roots placed in nutrient solution), aeroponics (nutrient mist sprayed on plants) or aquaponics (closed loop systems with plants and fish). The vertical farming sector has however grappled with significant challenges such as high power and operational costs, resulting in some operators failing or revising business plans.
Cold storage assets typically provide temperature controlled logistics solutions, maximising storage volumes by vertically stacking pallets. While the primary real estate asset is the cold storage warehouse itself, operators of such assets often offer a host of value-add services such as blast freezing, processing, defrosting, tempering and packaging, to generate further operational revenue streams and reduce food waste.
While venture capital plays a key role in promoting investment in new food concepts and technology (such as the development of plant-based proteins or the use of drone and robotic technology in the context of agriculture), infrastructure and real estate capital can also play a pivotal role in the development of other types of food related investments. Real asset capital typically has a lower cost of capital and can invest at a larger scale when compared to growth capital and, as a result, has the potential to help operational food sectors, such as cold storage and vertical farming, to deliver at scale and price competitively. This was observed by Franklin Templeton in their 2022 publication “Real estate investing opportunities in vertical farming”:
“Funding continued growth through traditional venture capital and private equity investment is expensive, and vertical farming operators will look to cheaper forms of capital that can be backed by physical assets. Here lies the opportunity for real estate and infrastructure investors.”
There is, at present though, a lack of consensus in the market as to whether such food focused, real assets sectors are considered to be infrastructure or real estate investments. An investor’s allocation perspective will be driven by both their “house” views but also the return profile and characteristics of the particular investment in question. For the foreseeable it seems likely that food focused investments will continue to sit in an area of convergence of the real estate and infrastructure markets, holding appeal for both types of investor.
Overall, it is clear that the investment theme of food security will be enduring and investment opportunities across the food value chain are likely to increase as we seek to deliver more productive, resilient and environmentally friendly food supply chains. It is for this reason, combined with the ability for operational real estate strategies to offer inflation hedging properties and drive returns in an otherwise challenging return environment, that we believe that the development of food focused real estate sectors is likely to continue.