Saturday, March 17, 2012

Farmland: the New Real Estate Investment

Institutional investors are becoming interested in a specialized real estate subsector:  farmland.  In today's low return market, its steady income plus appreciation has become attractive.  Looking at annualized returns for 1, 3, 5, 10 and 20 year periods (as of 12/31/2011), the income ranges from 6.59% to 7.90% while the appreciation returns 3.31% to 7.87%.  Total returns are from 9.9% to 14.88% according to the National Council of Real Estate Investment Fiduciaries (NCREIF).  In addition, agriculture has low correlations to other asset classes and is a hedge against inflation.

Some pension funds buying farmland in the past 1.5 years are Iowa Public Employees Retirement System ($100 million with UBS Agrivest), City of Alexandria (Va.) Fire and Police Officers Pension Fund ($5.5 million with Hancock Agricultural Investment Group), Oregon Public Employees Retirement Fund, the Los Angeles City Employees Retirement System and the Orange County (Calif.) Employees Retirement System.  Callan Associates, a consulting firm, has looked for farmland for investors eleven times in the past 1.5 years.  Between 2000 and 2010, they conducted one search.

To give you a frame of reference for the price appreciation of farmland, the NCREIF Farmland index's market value in the fourth quarter of 2006 was $1.4 billion.  In the fourth quarter of 2011, it was $29 billion - an increase of 107%.  The increase is driven by strong farmer profitability and competition for land.  It is not driven by the institutional investors coming into the real estate market.  The index only represents 1% to 2% of the $2 trillion in total farmland value.

The source for this article can be found here.

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