MAGAZINE: Farms in the air

Vertical farming promises a fresh start for redundant commercial real estate and some investors bet its profile is only going to grow.

Detroit is home to US rapper Eminem, who in his heyday captured the resilience and anger of the city as it worked to rebound from mass unemployment and empty buildings stemming from its steel and auto manufacturing collapse.  

During its renaissance, one trend witnessed was the use of urban spaces such as redundant offices for vertical farms as produce-growing companies moved into empty floors. Repurposed buildings today see start-ups such as Green Collar Foods growing herbs and leafy greens, peppers and strawberries. The niche segment is now trending in the US, with investment coming from high-profile sources such as Google and Elon Musk.

As Covid-19 accelerates trends already in place that have been creating empty commercial spaces in towns and cities, the question is to what extent will Europe emulate Detroit by using such space for ‘farms in the air’, and would such a use make financial sense for property owners?

At first sight, office and retail space in Europe has plenty of what a vertical farm needs: close proximity to large population centres, a good position on the power grid and ready supplies of water. Some market watchers even identify cinemas (and even former cruise ships!) as potential spaces.

Mother Nature evicted?
Vertical farms evoke strong emotions when it is said that they turn the tables on Mother Nature. Do they not overturn agricultural practices and the requirement of seasons to grow produce? Vertical farming, after all, is a high-tech business.

Vegetables grow in totally controlled interior environments with laboratory-like conditions, without ever being touched by sunlight, wind or rain. Optimal amounts of nutrients, UV light and air are fed through tubes to crops in trays the size of snooker tables, stacked on top of each other. The whole process is overseen by artificial intelligence, with not a farmer nor combine harvester in sight.

And yet there is support. ‘I think the time is now for asset owners to consider vertical farms as potential tenants,’ says professor Leo Marcelis of Wageningen University in the Netherlands, which is a European leader in agricultural science and technology. ‘I definitely think disused offices and shopping centres could be repurposed as vertical farms.

‘The technology itself is very sophisticated, but you do not necessarily need a sophisticated outer skeleton to put it in. The dimensions of the building are important; can they easily contain the stacks of trays? I would like sites which are large scale, with not too low ceilings and larger floor space.

‘But it is a new sector and we need to establish economic viability, since you need a huge investment and running costs are high. I am sure for a number of companies this will be viable, so the only question is how widespread vertical farming becomes.’ 

Vertical farming is expanding due partly to the eye-catching efficiencies it offers, compared to traditional field and greenhouse growth methods. In the Netherlands, a kilogram of tomatoes in a vertical farm only needs around three litres of water. In a greenhouse, it is 17 litres. Outdoors in soil, the same tomatoes can use up to 200 litres of water. The yield is therefore fifteen times more efficient than the best greenhouse-grown crops.

UK leads
In Europe, it is the UK that leads the way, followed by Germany and then Switzerland.

The largest vertical farm outside of the US and Asia is located in the English town of Scunthorpe. Owned and operated by Jones Food Company, it comprises a growing area the size of 26 tennis courts and 12 km of LED lights. Harvests are all-year-round, making seasons redundant.

Across the continent, the vertical farming sector is worth an estimated €50 bn and is in its early research and development phase. Maturation is forecast as being as long as 10 years away, according to UK-based Astarte Capital Partners.

The value-add alternatives investor - which provides institutional capital access to non-traditional real assets strategies – says it is in the process of identifying target investments.

Stavros Siokos, manager partner, believes vertical farming has appeal for investors with interest in thematic real estate and environmental, social, governance (ESG) issues.

‘Any strategy based upon proximity of assets to population hubs has a good future and we are moving into a world where large spaces will not be as utilised as they were in the past,’ he says. ‘So vertical farming is a big trend with a great future.

‘I see it as being like renewable energy 20 years ago, when most investors would not consider it, then it became an “alternative” alternative and today it is pretty mainstream.’

In continental Europe, Germany and France are seeing vertical farms attract investors, presaging expansion. For example, Berlin-based Infarm raised €84 mln last year from mainly European investors such as EASME, Atomico, AstanorVentures, Cherry ventures, TriplePoint Captial and Balderton Capital. Meanwhile, Agricool in France has drawn seed capital from Henri Seydoux, Xange, Danone Manifesto Venture, KimaVentures, Daphni, Bpifrance and MarbeufCapital.

Rents and leases
In this early stage of development, the segment comes with obvious caveats for owners of commercial space.

According to industry watchers PropertyEU consulted, the rent a vertical farm pays might be only 25% of what is normal for a corporate office tenant to pay. However, leases can be long   - in the region of 10 years.

‘Vertical farming is like government bonds, whereas office space is like corporate bonds,’ is how one expert puts it.

Europe’s fragmented regulatory framework is also likely to influence how effectively farms can move into buildings vacated by shopping centres and offices. Netherlands-based Cindy Rijswick, of Rabobank, researches the vertical farming investment landscape in the country where much of the hydroponic and aquaponic technology is developed.

‘It is not very demand-driven at present and is often something of a research and development project,’ she says. ‘Vertical farming needs a lot of water and electricity, which will make some existing buildings unfeasible for insurance reasons. Also, the logistical side is an obstacle, with heavy traffic from deliveries.

‘From the consumer view there is growing demand for locally produced food and Covid-19 is making this into an even bigger trend. Vertical farms can be a good investment in certain cases, such as if you’re in a location with limited competition from conventional growers and you do it efficiently – which many of these business do - and you have good customers, then maybe it is possible.’

Bright future
Talk with UK-based alternatives investor Gresham House and you get an upbeat forecast. Fund manager Peter Bachmann believes typical investor returns of up to 15% for vertical farms are feasible, while implying risk. 

Gresham House has a substantial – and undisclosed – investment in Fischer Farms, a UK company which uses shipping containers for housing vertical farms. Its methods enable growth on one acre what takes 200 acres to grow in a field, it claims. Gresham House manages the operations and is now looking for sites for a second and third farm by the end of the year, up to six times bigger than the first. 

‘There is a real estate component to what we are doing, and property investors should see how they can work with us to build up their property portfolios, rather than sticking too closely to their tried and tested segments,’ Bachmann tells PropertyEU.

‘There may be a play for real estate funds to joining by owning the underlying property and leasing it back to the operating company.

‘You can generate higher yields from this than from traditional asset classes and you’re supporting an asset which supports sustainability goals and ESG.

‘We think vertical farming has a huge future and I can’t say we’re there yet. But the cyclical macro-trends driving this are only going to accelerate. The sky is the limit.’


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