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Agriculture land as a component of your investments

, May 29, 2013, 0 Comments

agriculture-land-investmentIndia has a rising middle class and its aspirations to cater to. Amidst the high inflation, as the value of money reduces, where can an Indian find a bang for his buck? Equity markets have been volatile, making poor returns since 2008, property prices have seen great variation, fixed returns through bonds and fixed deposits do not suffice to cover inflation, our savior has been Gold.

That’s been the darling! What other opportunities except for the shiny metal pose as a good long-term investment? In my opinion, owing agriculture land is an extremely rewarding long-term investment opportunity. The intended approach of the article is one of ease, simplicity and a quick read. Here’s what makes it a rewarding investment:

Agriculture land investment provides a high level of capital protection as it’s backed by a physical asset. Over time the value of this investment only appreciates.

There is a fundamental limitation to the supply of land because they don’t make it anymore. Anyone who owns agricultural land is always favorably positioned.

Agriculture land is an attractive portfolio diversification tool as there is low correlation to equity and bond markets.

Investor interest in agricultural land across the country is on the rise. The early mover will benefit the greatest.

Agriculture income is free from income tax. It seems unlikely to be made taxable over the next decade given the political environment in India.

There is increasing demand, supply mismatch of agricultural commodities. This leads to increase in commodity prices that in turn forms the case for increase in rental returns.

Farmland has been a stable income-producing asset that has stood through the good and bad times. Like gold, it has been the storekeeper of wealth and value.
Despite the rewards, there are several challenges in owing agricultural land. These are:

One of the biggest hurdles in owing agriculture land is the requirement to be a farmer. While there are ways of getting converted to a farmer, the process isn’t as simple.The lack of professionals in the field, force an individual to scout around to learn of this process. Often this exercise is a time consuming and expensive process. There are several deceitful brokers waiting to pull a smart one over you. It is difficult to trust one and the fragmented nature of the industry doesn’t help either. Word of mouth could be your starting point, but it may not necessarily be helpful.

Another major hurdle is the risk of illegal encroachment, or frankly, of being sold a worthless piece of land. One needs to ensure that the title of the land is clear and it isn’t encumbering or has litigation on it. Even after engaging the legal aspects with a proper realtor/lawyer and local broker, one cannot be too sure. A thorough title due-diligence needs to be done on the land with at least 30 years historical title check. There should be no minor as owner of the land. One needs to ensure that there are no village roads/lanes; no electrical wires running though the land. One also needs to check whether the farmers have been rehabilitated if the land is vacated.

Location challenges like access to a main road,development of motor able roads, availability of or accessibility to electricity and water for the site also needs to be kept in mind. The price of a good land parcel vis-a-vis neighboring parcel also needs to be thoroughly evaluated.

While the benefits of owning land are obvious and plenty, the tiresome efforts of time, money and finding the right people do not guarantee returns.

However, with great precaution, and due diligence one can acquire agriculture land as a component of their investments. If got right, it will certainly add great alpha to your portfolio.

About author
Aejas Lakhani is a MBA (finance) from the Asian Institute of Management, Manila. ...more