Sunday, 24 November 2013

Owning Land



If you believe as we do that government issued currency is going to collapse and the entire financial and monetary system will soon go through a massive change, then owning agricultural / farmland producing property may be one of the best ways to survive and prosper during this period.

Here are some of the main reasons for that belief:

It Can’t Be Repatriated

As the countries around the world continues to devolve the insolvent and bankrupt overly-indebted governments will continue to feed off of the assets of their own citizens at a rising pace, just ask any Cypriot. This is far from just conjecture as it has happened continually throughout modern history.

In 1933, the US government confiscated the gold of its citizens and did not even allow them to own non-jewellery gold until again until the 1970's. More recently, France has increased its top income tax rates to 75% and even tried to move them to 100% as they skirted with going “full commie”. Never go “full commie”. 

There have also been a rash of pension fund seizures throughout the West. In 2009, Ireland seized €4 billion from its Pension Reserve fund. In 2010 Hungary told its citizens to remit their private pension funds to the government. Later in 2010 the French parliament took €33 billion from their national reserve pension fund and in 2011 $80 million in private retirement funds were transferred to the state’s pension scheme in Bulgaria. And, in September of this year the Polish government confiscated the bulk of the assets of the country’s private pension funds.

Think it won’t happen in the Sri Lanka. In fact, it already has. Every Rupee of Social Security funds have already been taken and spent by the government with an IOU left in its place. And parliament has had initial talks about expropriation, nationalising private property / businesses and raising loans through appropriation bill

People Need To Eat

While we expect public debt to wreak havoc throughout the world and cause an economic depression that will be written about in future, there are a few things that people will still need to survive at the most basic level: energy and food. In that sense, agriculture is depression proof… even for the type of super-depression we are expecting. To add to the bullish case for agriculture is pure demographics. The world population has gone up nearly 7 times in the last century. That is a lot of new mouths to feed, literally. 

An Escape Hatch

We expect life in Sri Lanka and many other indebted countries to be nasty and brutish during this collapse. Farmland the world over is outpacing other real estate properties. For instance, in the United Kingdom, farmland is outpacing the price of prime central London property for the first time in 16 years. Predictions that the average price of an acre could soon hit a new record soon. And that is in the decaying United Kingdom. But, all over the world, there is not much arable land on the market. People simply aren't selling. Owners hold onto arable land as a long-term investment, like precious metals.

During crisis, arable farmland does better than industrial, commercial and residential properties, as was seen during the 1973 oil crisis and during the 1990 Gulf War and now during the Global Economic Crisis. Arable farmland is a great hedge against inflationary side effects of quantitative easing. Because the world is in a period of increasing demand for crops due to changing lifestyles in emerging markets, each acre of arable farmland needs to become more efficient. With emerging economies moving towards a high meat diet, increasing livestock demand, and bio-fuels diverting crops from food use to energy crops, it doesn't take a degree in calculus to see why arable farmland is attractive. Every day there are more than 200,000 new mouths to feed. Farmland in many parts of the world has seen low volatility compared to other asset classes, like listed equities, and it has experienced approximately 1/4 the volatility of the S&P 500 over the last 20 years. It has a strong linkage to emerging market growth with potential for high cash flow. Farmland generates higher returns due this low volatility.

Investors in public equities must accept nominal real returns below 2% over long periods with increasing volatility. Farmland generates higher absolute returns with lower price volatility, meaning farmland offers superior risk adjusted returns over public equities. And, quite typically by a large margin.

The correlation of farmland to traditional retail investments, like equities and bonds and commercial real estate, is quite low. It is important for investors to structure diverse portfolios, and farmland allows the retail investor to do this.

Farmland investment is ideally suited for Sri Lanka. The consumption of energy and agricultural commodities goes up as GDP/capita growth increases, especially early on in the process. Traditional investment advisers will warn you of political risk in “emerging markets”, but we see it quite the opposite as any farm owner will tell you. 

If you own arable land, you can lease it out to farmers for example. Then, instead of operating a farm, you can get 100% upfront payments. Thus, by cash renting, arable farmland investors enjoy positive cash-flow without having to operate a farm at all.

To put it simply, farmland is not at risk of becoming a "bubble" like so many economists believe it to be. Some fear this might be the case because investors have piled into the space, but this isn't reflection of some sort tulip mania, but rather a reflection of a run from the printed money supply. Farmland can be used as a hedge against hyperinflation.

Not only with arable farmland do you get property, but you get a tangible asset with the capacity to provide a return from the crops or in the form of rent. For the first time in decades, the price of farmland is rising faster than residential property. Last year, according to experts, the cost of prime arable land increased by 10.7 percent in Sri Lanka.

Therefore, we suggest that people unfamiliar with the business and culture look to invest in farmland properties that are already operating and open to foreign investment.

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