Recent global economic turmoil and the low interest rate environment has driven institutional investors to look to real assets, especially farmland, according to Andrew Nicholas Smith, co-founder and chief product strategist at OWLshares, an alternatives index developer.
“Purchasing a farm directly can be rewarding, both financially and sentimentally, however there can also be significant barriers to entry and risks,” Smith said in his recent report, Farm Land: The Risks & Rewards of Buying Direct in which the returns, barriers to entry and investment risks are evaluated.
According to the report, farmland outperformed the S&P 500 index between 2004 and 2013 by an average of 2.67 percent a year. A $1,000 direct investment in farmland in 2004 would have grown to $2,428 by the end of 2013, whereas a $1,000 investment in the S&P 500 in 2004 would have grown to $1,797 over the same period.
“The driving force [of the better performance] is simply that people are using farmland as a hedge,” Smith told Agri Investor. He added, “In the long term, the driving factor is technology. How to use technology to have more efficient harvests is going to be the next big driving force of farmland value.”
During the same period direct farmland investment generated a compound annual growth rate (CAGR) of 19.1 percent for leveraged farmland and 9.3 percent for unleveraged land, both being higher rates than a leveraged S&P 500 and unleveraged S&P 500, the report says. Institutional investors such as big pension funds and high net worth individuals look closely at the compound annual growth rate when making direct investment as “it is the most important performance metric for an investment”, said Smith.
Click to read Farm Land: The Risks & Rewards of Buying Direct.