Investment in Farmland
This post is also available in: Spanish
Investment in farmland suitable for either livestock or crops, is by far the safest investment, especially long-term ie. 5 to 10 years. It is an area little studied by modern investors, who have remained in the dot com investors world and have forgotten the traditional investment: farms.
Today, the following observation is most certain: where there is arable land in a stable political environment with clear rules and access to ports, you can make a minimum investment of 9% and a capitalization rate of 4%.
These figures are highly conservative, taken from the average yields of the United States over the last 50 years.
As a safe investment in the medium term, investing in farmland resists all kinds of onslaughts. It is feasible that substantial returns will be generated, always being a safe haven in troubled times.
The advice for investors who are at some distance is that it is a fact that an accurate and honoured advisor’s knowledge is required who will tell you the pros and cons of a particular investment.
Then, to maintain and increase production requires skilled workers and advisors.
In this regard, knowing the intricacies of the market, Gateway to South America has an advantage, knowing why, in South America, it is possible to improve handsomely these conservative figures from a competitive market.
Why an investment in farmland in South America?
If we look at countries that we recommend investing in today: Argentina, Paraguay, Chile and Uruguay, we note that there is room for modernisation. In a political environment conducive to foreign investment, this is something very relevant, and to be taken into consideration.
A brief overview of the global market: in the UK, capitalisation rates are much lower, about 1-2%, but the valuation of the investment has contributed to a larger share of the total.
As an example, one hectare of arable land, grade 3, has a value today 5 times higher than 25 years ago, discounting inflation. That is, apart from the owner’s profits and annual crop production, the net value of the investment has increased only by appreciation.
Without going too far, has your property, the house you bought a few years ago, increased its value, say, in ten years? After inflation, of course.
The market for farmland within the short term can fluctuate quite a lot, leading to deception; however, always calculated to ten years, there will be a comparable valuation on the profitability of many other investments considered safe and conservative.
There is still room for growth in South America, i.e. in farmland of good quality, which, bought at a very good price and with adequate modernisation, will return more than elsewhere, over the same investment with the same characteristics.
Look at it this way, there is no new land in the world. As in the cities, which, with automation in buildings, leads to well-placed and better-built apartments for renting – which is fine – in the case of agricultural fields, we would say that this is even safer, in the sense that there is little change from one year to another.
In a city you cannot change your property, or change your neighbours every year: you have to sell and buy another property in a new neighbourhood.
Moreover, amongst the best-known investment advisers of the world, there are few who manage an investment portfolio in modern farmland, except in the United Kingdom, the United States and New Zealand, countries that have maintained their agricultural tradition. This is because in times of depression, governments in these countries supported their farmers, who today are an example of profitability in the industry.
What keeps away investors?
Lack of knowledge!
And maybe a bit of snobbery, considering work on the land as something stuck in the past in terms of cultural evolution.
This is fully applicable to many investment advisers raised in urban environments, for whom any field seems like a forest of dangers.
They remain unaware, or don’t want to admit that a stock exchange is a jungle that is a lot wilder than a vineyard!
Surely, when you started investing, you approached an advisory firm. Nobody in their right mind buys without good advice. For agricultural investment, it is just the same; you have to locate a specialist who speaks your language, who is experienced and has a solid reputation.
Then you may decide whether to invest alone, or go in with a group of friends and acquaintances in a trust or each buy a share in the land, or, better yet, you motivate your investment advisor to go in as a partner. It is not the same as importing machinery, for example, where using half a container is worth about the same as one that is complete.
As regards market research, agricultural fields are just like a retail outlet in a city: you carry out a market study, with annual projections for the medium and long term.
Land and water are variable; no field is like any other. The consultant will be important to be able to advise you about these matters, as well as public policies, such as in the case of Uruguay, where each piece of farmland is on the public record, which provides quality and transparency to the market.
The consultant is also needed for banking services, to inform you about a local bank’s reputation, or to assist in setting up agreements with your bank if you want to obtain a mortgage or a letter of credit to purchase stock and/or machinery. Modern and robust banking is a support that facilitates any investment, and this goes for the whole industry and commerce worldwide.
This is another reason for recommending these countries. Here we must add Chile, which offers no bargains on the price of land; however, it has an entire modern infrastructure for agricultural exports of sensitive products – wines and fruit – and certifications.
To pause for a second: it is not the same to export bulk soybean to feed cattle – at a very good price these days – as to export fruit that within two days will be on the table of a citizen of New York or Tokyo.
There is a strategy that says that “Money should be invested in areas that are not sufficiently developed, where good soil with good quality water can be purchased at low cost to maximise yields”.
Clear rules and transparent markets
We’re talking about markets that do not provide subsidies, i.e. you compete like your neighbour: you will not get subsidies or special treatment, and neither will your neighbour. That is the guarantee of transparent markets; there is no distortion.
In principle this does not seem important; however, some markets normally function with subsidies. If the government changes, subsidies may increase – which would not be a problem – but they can also disappear overnight.
This, too, is important, if you intend to export the produce of these countries. Most of the countries all over the world have safeguards against subsidies, i.e. if you receive a USD100 subsidy, exporting its produce to a third country, you would pay USD100. So you would really be competing with their local producers, and, not due the subsidy that you are getting, you might annihilate that local market.
There are not many places in the world where land is an asset valued thoroughly by public policies, and where investors can be assured of entering and exiting that market with transparency. This is the case in Uruguay, Argentina, Paraguay and Chile.
English Editor: Audrey van Ryn
Writer & Translator: Mª Verónica Brain
Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru and Uruguay, providing expert advice on property acquisition and investment tours.
About Geoffrey McRae
Geoffrey McRae is the founder of GTSA - Marketing. He is a New Zealander with a strong Agro-business and Real Estate background spanning over 30 years. Prior to coming to South America, he was one of Australasia's most successful Real Estate negotiators reaching the highest level in the industry. He has a reputation as a brave and a formidable negotiator and creative 'deal maker'. His reputation for discretion, experience, and expertise have involved him in representing some of the world's highest profile investors. I hope you enjoy reading our news site. Please share it on your social media below.