Pension funds' investment spurs popularity of farmland property

April 12, 1992|By James M. Woodard | James M. Woodard,Copley News Service

Farmland is becoming a hot investment property in most regions of the country.

The popularity of farmland as a potential investment has grown dramatically among pension funds and other institutional investors during the past two years, according to Murray R. Wise, president of Westchester Group, Inc., a farmland marketing consulting and management organization.

"Several of the country's largest pension funds have recently invested in farmland," Mr. Wise said. "Fund managers who once thought investing in farmland was a really silly idea have taken note of what these properties have done in recent months and years and are now investing millions of dollars in farmland."

"Land values can be much higher than normal if the land is located in an area that might be commercially developed within the next five to 10 years, or if the property is primarily being acquired for a home site," said Don Petty, a seasoned land broker and farmer in California.

For example, I sold a 10-acre land parcel with a good growth of avocados for $75,000 per acre. It was a super-view property. The buyer was primarily motivated to purchase the land for his home site, not for the production of avocados. Basically, it was a 10-acre home site purchased for $750,000.

Mr. Petty noted that most of the farmland acquisitions by institutional investors are large land parcels. And there are very few such land offerings in many areas.

Mr. Wise pointed to the record income and low price-earnings ratio as major factors in making farmland a more attractive investment option throughout the country.

Recent annual returns from income plus appreciation (value increases) are generating total returns in excess of 10 percent, he said.

"Farmland provides many benefits, such as reasonable cash flow, appreciation potential and diversification," Mr. Wise said.

"Also, farmland has a minimal downside risk. Its values rose dramatically in the '70s, based on investors' perceptions of rising commodity prices, farm income and inflation rates. But by 1982 a stronger dollar and a highly competitive world market had cut into U.S. farm exports. Farmland fell 50 to 70 percent.

"Since then, farm debt has been reduced from $192 billion in 1983 to $134 billion as of 1990. And farm exports have returned to more stable levels and commodity prices have recovered."

Mr. Wise is bullish on the current and future market for farmland.

"The '90s are shaping up to be an excellent time to invest in farmland. While most other investments are more volatile, farmland values have increased every year for the past four consecutive years. From every indication, that trend should continue."

The trend is particularly apparent in Iowa. Land values there have increased 46 percent since 1986, according to a survey by the Iowa Farm and Land Chapter of Realtors Land Institute.

The survey reveals a .4 percent increase in values during the past six months.

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Q. Why are there so many multimillion-dollar home sales?

A. This is still a very small niche of the housing market, but it is growing. One key reason is that there are more people in a financial position to buy them.

There are now a million more millionaires than in 1982. And more than 100,000 households now have a net worth of more than $10 million.

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Q. In what part of the country are home sales increasing most rapidly?

A. In the Midwest. The home sales rate there is double the rate of 1991 and is the highest it has been since 1978.

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Q. I was interested in your recent column on brokers' commissions. Do some of the new plans include a flat fee paid up front?

A. Yes. Some brokers now offer full or partial marketing service for a flat fee. Some offer a combination of up-front fee and commission.

For example, the 60 offices affiliated with the recently organized Why USA broker franchise group offer sellers the option of paying a $495 fee, reducing the regular sales commission by 1 percent. Or sellers may pay a total fee of $990 for a modified service program. Or, if preferred, they can pay full commission for full service.

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Q. When is full recovery expected for the commercial real estate market?

A. A recent pessimistic report from Arthur Anderson Real Estate Services Group states that "commercial real estate may languish for another three to five years behind the general economic recovery expected this year."

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