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.
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