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Can vertical farms compete?

Savills' Andrew Teanby, Associate Director Rural Research and Joe Lloyd Research Analyst Rural Research conducted research looking at four key areas to maximize margins and ensure market opportunities.

While the UK makes up 3.1% of the average global investment in ag-tech, investment per capita lags far behind international competitors. Nations such as Israel and Singapore face unique challenges that demand efficiency.

Even so, the UK is behind its nearest neighbours Ireland (26% less per capita) and France (37% less per capita). That is not to say such comparatively low levels of investment are detrimental to development. The UK finds itself on a par with the Netherlands, widely acknowledged as one of the most advanced agricultural systems in existence. The differences between the UK and Netherlands remain stark and so the question arises: how can the UK better invest in ag-tech?

Vertical farming is one area where the UK is demonstrating progress, both in terms of production and innovation. Intelligent Growth Solutions in Scotland and Jones Food Company, based in Scunthorpe, are considered world leaders in the sector.

Yet this is occurring against a wider backdrop of struggles and difficulties in the industry. InFarm, Europe’s biggest vertical farming company recently laid off 500 workers. Agricool, a French enterprise that had raised €30 million in funding, went bankrupt in April 2022.

Vertical farming is simply not cheap. A premium vertical farm can cost as much as 750% more than a basic glasshouse. While glasshouses cost in the region of £400 to £1,000 per square metre, a vertical farm is likely to cost a minimum of £2,000 per square metre or £3,000 per square metre for a high-tech, closely controlled system.

The smallest (5,000 square metres) entry-level vertical farm will therefore cost a minimum of £10 million. With such expense, keen attention must be paid to maximising the cost-effectiveness of the installation and its market opportunity.

Photo taken at New Leaf farm in Dubai

The company has provided four key areas to focus on when establishing a vertical farming business.

There is a misconception that vertical farms could be built in highly urbanised areas and sold directly to consumers. This may be possible in select cases, however, the scale and infrastructure necessitated by controlled environment horticulture is better suited to out-of-town areas, particularly those with enhanced logistical connections and reduced land costs.

One such location could be freeports. As well as being close to existing logistics networks, businesses located in freeports would enjoy certain benefits such as paying 0% NICs on the salaries of new hires for up to three years, 100% business rates relief on their premises from the date of occupation for five years and full SDLT relief until September 2026. Savills Research calculates that cost savings could amount to £2.85 million for a 10,000-square-metre unit over five years. This calculation excludes plant and machinery capital expenditure allowance, meaning actual savings could be greater.

Investors may see warehouses as the ideal space to establish their vertical farms. Unfortunately, vertical farms are considered a comparatively weak tenant alongside a booming logistics sector that is continuously demanding bigger and better space. To compensate for this perceived risk, landlords may expect a higher deposit or rent than the local baseline. In such an event, it may be more financially prudent for a vertical farm to buy its own vacant site and develop bespoke facilities from the ground up. If demand from logistics weakens, vertical farms may be more easily able to enter into rental agreements, however, this seems unlikely in the near term.

Smallhold's LA facility pictured

The energy profile of a vertical farm is quite different to a glasshouse. The presence of lighting, even efficient LED systems, generates heat that must be removed rather than augmented. In addition to this, the need for cooling and lighting, automation, hydroponics and other systems demand large quantities of electricity.

Vertical farms should therefore look to partner with renewable energy providers, arranging a power purchase agreement that achieves a discount for the farm and a premium for the energy supplier.

Vertical farms are designed to exert highly controlled conditions. While this comes with an energy cost, it does expand the potential range of crops that may be grown and when they can be grown. This, therefore, allows conventional, out-of-season crops to be grown and sold at a premium and at a faster rate, allowing multiple harvests in a shorter space of time.

However, precise control permits the growth of more specialist and often higher-value crops. Anything from medicinal-grade cannabis to saffron, the world’s most expensive spice, can be grown in a vertical farm.

For more information:
Andrew Teanby, Associate Director Rural Research and
+44 1522 507 312
Joe Lloyd Research Analyst Rural Research 
+44 207 299 3016