In many aspects, the world has already returned to its economic tracks. However, to me, it’s clear that some mindsets we carried with us during the last two years are still with us, and in my opinion, they are here to stay. I’m talking about, for example, the rush after safe havens. This means seeking steady jobs, saving money, and investment-wise – looking for natural hedges. The last is common to many investors today. A substantial number of investors nowadays seek to invest in steady and safe assets such as gold. However, that’s not the only steady asset investors are hot on its heels: The popularity of farmland as a ‘safe’ investment has also greatly increased.
Is the contemporary frenzy after farmland investments justified? Is investing in it a good idea? I, Ofir Bar, believe that I can help you with some advice regarding this topic. I have a two-decade experience in real estate investments. I have looked into the farmland market, and I have some conclusions I would like to share with you. I hope these might give you some insights. Let’s start by analyzing why farmland is considered a safe asset, popular for investing when expecting a rainy day.
The distinct benefits of investing in farmland
Farmland investing holds two sources of investment returns: passive income from periodic rental and crop payments, and price appreciation when the property is sold. Higher crop prices translate to higher payments for investors, which makes farmland a natural hedge against inflation.
Farmland also provides steady average annual returns. Between 1992 and 2020, it provided average annual returns of nearly 11%. In comparison, the stock market returned only 7.8% over the same time period, while gold, another asset considered a ‘safe haven’ against inflation, returned only about 6%.
During this time period, the volatility of the stock market was 16.7%. Gold wasn’t far behind with 14.8%. By contrast, the volatility of farmland was 6.8%, making it a much safer asset than other ‘stable’ assets.
Lastly, it’s important to know that investing in farmland adds useful diversification to investors’ portfolios since farmland isn’t correlated with major asset classes such as stocks and bonds. This means that shocks that erode common assets’ performance don’t have a similar impact on farmland investments.
The challenges farmland investments pose
The toughest barrier that stands between investors and investing in farmland is the knowledge barrier. Understanding local land laws and terminology beforehand is a must. Without being fluent in these, investing in this field will be extremely difficult. Land laws are different in every country and may also vary in different jurisdictions of the same country.
For example, a number of countries restrict land ownership. One of the most widespread and strict land laws is the prohibition of converting fertile agricultural land into residential one. So keep in mind that you probably wouldn’t be able to do as you like with the farmland, even though it’s yours.
Investing in farmland places challenges that investors probably don’t encounter with other assets. In this kind of investment, they have to bring to mind the risk of destructive weather and wildfires consuming lands and crops. As years roll by, we witness more and more lands being damaged by global warming. This factor is definitely worth thinking about since it poses a real risk to investors.
When investing in this kind of asset it’s even more important to be careful with the property’s documents. Many countries have made it easier for investors to find all relevant information and documents online, yet I still urge you to take extra care and make sure you have all the necessary paperwork. Failing to withstand the laws of farmland investing might end up being a real pain in the neck due to strict legislation in many countries.
You should also bring to mind interest rates. This affects farmers’ incomes and how much production costs. Allow me to explain a bit more about the production: Before having a chance of seeing a return on investment, investors need to make sure they have the resources to produce the assets’ yield in an efficient manner in order to create a steady flow of income.
Challenge accepted?
Investing in farmland confronts investors with challenges they have probably never faced before when dealing with other assets. As you can understand from what I said so far, investing in this field in a successful manner requires broadening your knowledge about investments, and learning the varied laws of different countries. For this reason, I suggest farmland investment mainly for the more experienced, who have been navigating the investment world for quite a few years. Whichever path you choose in the investment world, I wish you success with a pinch of luck. That never hurts.
