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Farmland investing trend in real estate

Let’s rewind to 2021. It was an era of easy money, and the U.S. real estate market attracted $57.7 billion in international capital, a 49% year-over-year increase, a significant share of the $69 billion in total inflows. It marked one of the most prosperous periods of foreign investment in decades.

Fast forward to 2023, and we have a considerably different environment, rife with inflation and higher interest rates. Yet many segments of U.S. real estate maintain their appeal to investors despite the headwinds. The U.S.'s political stability, steady growth and comparable affordability offer a haven for investors, especially foreign investors facing more severe home-country risks ranging from political to geopolitical to economic and even asset confiscation.

Look no further than Miami as an example of a market drawing significant capital. As the world's fifth top real estate market, Miami is Latin America's gateway and lures in foreign capital with its economy, low taxes, beaches and diverse culture. After attracting $6.8 billion of foreign capital in 2021-2022, a significant 34% year-on-year boost, 2023 looks to bring in much of the same. For instance, one condo developer told the Wall Street Journal he saw a 30% surge in Brazilian buyers since October 2022.

Yet real asset investment opportunities extend beyond the appeal of beachside condos and commercial property. Introducing farmland, a newly accessible asset class with a unique blend of tangibility and stability. Let’s explore the ins and outs of this asset class and how its characteristics have historically provided portfolio diversification, stabilization, growth, and resilience to market fluctuations and inflation.

Beyond the urban appeal: A spotlight on farmland investing

The U.S. real estate market is appealing, particularly regarding both commercial and residential properties. However, some investors may want to consider a less-traveled path: U.S. farmland. As a growing sector within real estate and real assets, U.S. farmland can offer investment prospects that are hard to find elsewhere, especially for international investors looking to bolster their U.S. real estate portfolios.

Diversification through low correlation with other assets. Farmland investing has been a draw in the arena of real assets because of its historically low correlation to traditional asset classes such as stocks, bonds, real estate and broader market indices. With a correlation to U.S. stocks at -0.05, U.S. bonds at -0.17, real estate at 0.42, and U.S. REITs at -0.01 from January 1, 1992, through December 31, 2022, farmland investing has provided the much-needed diversification global investors are seeking amid heightened uncertainty.

Historical resilience and low volatility. Beyond its low correlation with conventional assets, farmland investing has offered consistent returns with low volatility. Over 30 years, farmland's performance consistently delivered double-digit returns. Moreover, as this real asset’s supply dwindles, the NCREIF Farmland Property Index tripled since 2000.

Farmland's low volatility, with a standard deviation of just 6.64%, has been markedly lower than the figures for U.S. stocks, U.S. REITs, and even real estate — these clock in at 17.80%, 19.32% and 7.62%, respectively (1992-2022).

The 2008 recession served as a remarkable example of farmland's resilience. As stocks and high-yield bonds took a nosedive, dropping by 52% and 26.2%, farmland posted a quarterly return of 7.33%. In 2022, a year when the traditional 60/40 stock-bond portfolios recorded their worst returns in a century, farmland bucked the trend. Farmland returned 9.60% last year — a clear affirmation of its stability and resilience.

But how does farmland’s performance fare against commercial real estate? Despite having lower volatility, farmland's 11.98% average annual return since 2000 bests commercial real estate’s 9.5%.

Competitive risk-adjusted returns. Farmland's high average yearly returns and minimal volatility indicate superior risk-adjusted returns.

A helpful gauge for assessing risk versus reward is the Sharpe ratio, which measures asset class returns above the risk-free rate against its volatility. In other words, the higher the Sharpe ratio, the better potential risk-adjusted returns. In this respect, farmland (1.22) impressively outperforms, with a Sharpe ratio triple that of U.S. stocks (0.39), U.S. Bonds (0.36), and U.S. REITs (0.35), and 1.5x higher than real estate's (0.76) between 1992-2022.

Passive income through reliable cash flow. Farmland is more than just acres of corn, citrus, apples, or almonds; it's considered a reliable store-of-value that provides stable cash flows from various sources.

Of course, crops are a significant income driver. Last updated on February 7, 2023, crop cash receipts in 2021 summed up to an impressive $241 billion. Additionally, 2022's farmland rent rates stood at $227 per acre for irrigated cropland and $135 for non-irrigated, presenting a consistent income stream.

Farmland returns are also generated through land appreciation. Similar to gold, farmland is a scarce asset. The supply of arable, workable land is steadily declining, while the global demand for agricultural products is increasing. As a result, what land is currently in use is steadily increasing in value, with farmland value having surged 12.4% this last year, hitting a record high of $3,800 per acre. Gold, on the other hand, boasts just a 7% rise since January 4, 2022.

Inflation protection. In a world where supposedly cooling inflation continues to double the Fed's 2% target, farmland investing emerges as a refreshing store-of-value.

As we’ve seen for the last 18-plus months, conventional assets do not like inflation. The S&P 500 ended its longest bear market since 1948 under inflation's weight, while bonds, once considered sturdy, lost their appeal in 2022 as yields succumbed to surging interest rates. In this environment, even commercial real estate, often regarded as steadfast, faces headwinds of its own.

Gold is traditionally considered a top inflation hedge, but the numbers tell a different story. Gold’s relationship with the U.S. CPI since 1992 shows a correlation of -0.15, while farmland's is over four times stronger at 0.17.

In other words, farmland hasn’t merely withstood inflation — it has capitalized on it. As food prices climb, so should the value of the land that nurtures them. The NCREIF Farmland Index supports this; pre-1992, the index outpaced inflation by two-fold; post-2000, it tripled it.

Farmland investing: A superior complement to your real estate portfolio

Investing in farmland is no longer an elusive venture. Investment managers have revolutionized the sector, bringing this historically stable, uncorrelated asset class to a broader audience. While Miami real estate sparkles on the world stage, U.S. farmland makes an attractive complement to one’s U.S. real estate allocations.

When hunting for the latest alternative or real asset investment, you may want to consider the compelling prospects of American farmland. Unveiling itself as a remarkably stable asset, American farmland, once regarded as unattainable, is now accessible to all, breaking down geographical barriers.

*Disclaimer: This communication is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation, or needs of any investor. Historical data is not indicative of future results and may not reflect fees which may reduce actual returns. Any historical information is illustrative in nature and may not represent future results, therefore any investor may experience different returns. You should not make investment decisions based solely on the information in this article.


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