What makes farmland a low-risk, high-return asset?
The land is one of the oldest investment classes in existence, producing enormous wealth over generations. However, it has been overlooked by institutional investors over the years up to the point where unexpected market events led to increased market volatility, and investors started looking for assets that are more reliable and resilient.
Investing in farmland represents an attractive, long-term investment while providing significant wealth preservation during times of economic turmoil. Another factor that boosted demand for tangible assets (real estate, infrastructure, and farmland) is the low cost of borrowing. This in itself is also a product of the low-interest rate environment most economies worldwide are in.
Among other tangible assets, farmland is the one less likely to depreciate over the years. Even though properties like homes, offices, and factories need constant maintenance to hold their value, farmland, for the most part, only requires proper management during farming. On the contrary, when farmed sustainably, the value increases because the soil becomes healthier.
What makes farmland low risk?
- Crop Production will double: Let’s start with a huge one; humans require crop production to double over the next 30 years due to rising population and rising demand per person (thanks to reduced poverty and growing middle classes).
- Low Volatility: Volatility is a massive risk factor for any investment. Farmland simply doesn’t boom and bust in the same way other investments do. A factory’s profits depend upon the whims of its customers and the economy – investors learn to live with the ever-present dread of the end of any given boom cycle.
- Demand for food is insulated from these economic cycles, hence the lack of correlation between farmland and other real estate types. Whatsmore, a diverse, sustainable farm can further fortify itself by spreading bets over several crops.
- Land is resilient: Natural disasters destroy buildings. The same disaster might wipe out a year’s crop on a farm, but the land is still there next year.
Why is it a high return asset?
Returns from farmland are higher because it’s a limited asset – “buy land. they’re not making it anymore” (as Mark Twain famously quipped). In any given region, large firms are buying up the land, understanding the profitability and stability of the opportunity. This increasing scarcity of the asset is consistent with a rising tide of value per hectare, particularly when coupled with the growing demand for the produce of the land.
Farmland has outperformed the S&P 500 on average from 2004-2013 by 267 basis per year. This means that a $1,000 investment in farmland in 2004 would have risen to $2,428 by the end of 2013. On the other hand, a $1,000 investment in the S&P 500 in 2004 would have been increased to $1,797 over the same period. That is a difference of 6,311 basis points or approximately $631 for every $1,000 invested.
The annual return of the S&P 500 for the last 25 years has been 8%, and the average yearly return of farmland for the previous 25 years has been roughly 11%-12%, according to the NCREIF index.
The prospects of the Portuguese farmland
Based on current prices, the market expects Portuguese land to increase 20-40% over the next ten years. At Pela Terra, the current rent for farmland we are acquiring is 4-6% annually.
Our research and experience have concluded that converting land to organic can increase rent by 20% and land value by 25%. Another essential point to consider is that leveraging land investment could increase all figures by up to 2X.
As our name suggests, at Pela Terra, we invest in farmland, and we have the expertise to lead you through your next investment. If you need our guidance, we are always happy to help.