Reap returns from farmlands

Real estate investment conjures up images of flats, villas or small plots of land, but there is yet another way to invest – farmland. “But I am not a farmer”, you protest? Relax. One could reap returns from owning a farm - an investment described as ‘gold with a coupon’, without getting one’s hands soiled.

The cost of land in rural areas is typically low, offering an affordable entry point for investment. An acre of farm land in rural areas of Tamil Nadu can be acquired for as low as Rs 1.5 lakh per acre, compared to Rs 1.5 crore for an acre for residential land (at Rs 350 per sq ft) in a town close to the farm.

The Harvest

Farm land investment can offer three main benefits — income generation, land price appreciation and diversification due to its low correlation with other assets. Food prices typically keep pace with inflation and hence the income from a farm may provide a good inflation hedge.

Food prices have been on a highly inflationary trend, at 11.9 per cent in January 2013, driven by growing supply-demand mismatch.

Lay of the Land

The bonus with farm ownership is that farming income is exempt from income tax and the capital gains also qualifies for tax exemption if the land is outside (typically 8 km limit) the boundary of a civic body such as municipality.

Farm buyers from the city typically lease the land to a local farmer or farm manager who provides a fixed lease payment or share a portion of the profit (in cash and produce). Many investors also pool together and invest in a farm – to afford a larger chunk of land and share monitoring responsibility. Groups have also been known to take up initiatives such as organic farming for own consumption or for sale.

Some buyers may invest purely for capital appreciation. Factors such as road access, infrastructure improvements and economic development determine price appreciation. Urban sprawl has helped those who bought land near Chennai to earn a return of over 16 times their investment in the last 4 to 5 years, but these may also carry higher risk.

Those of us who prefer investing in constructed structures may prefer a farm-house built on agriculture land. These are usually close to cities and may be part of a farm-house community. The lower Floor Space Index (FSI) for farm land (0.02) limits the size of construction, yet pay-offs include favourable property tax and a peaceful place to spend ones weekends. Some even earn an income by renting it out as a vacation property.

Dig Before You Sow

Purchasing a farm land is not for the faint of heart. One needs to plough through a plethora of legal documents and issues to protect the investment. To start with, agriculture is a state subject and the laws vary between states.

For example, states such as Maharashtra and Gujarat restrict agriculture land ownership to “agriculturists”, but others such as Tamil Nadu have no such limitation. A farmer from one state can purchase farm land in other states, although certain states such as Gujarat did not allow this in the past. Local panchayats may place restrictions on sale and one is also faced with a long list of issues such as title verification, encroachment hazard, dynamics of local politics and land sharing norms.

Making Hay

Farm management requires special skills that most of us do not possess. Hence the service of an expert is usually required, adding to cost. When buying undeveloped or fallow land, one should budget for capital required to generate income. Fencing the land, equipment purchase and storage arrangement require capital. Typical recurring expenses include farm labour, purchase of seeds, fertiliser/pesticide and transportation. Income from agriculture land is hard to estimate. Vegetables and cash crops yield immediate but unpredictable returns, growing fruit and nut trees provide late but predictable returns. Income may also be augmented with fruits, nuts, teak and bamboo plantation, dairy farming and poultry.

As profit depends on the type of crop, size and fertility of the farm, typical numbers may not be representative. Resourceful investors may earn higher profits by cutting out middle men and selling directly to the consumer. While profit per acre of Rs 15,000 to Rs 50,000 for orchards and staple crops have been reported, it is also common for returns to be negative.

Farm Errs

Farmland is an illiquid asset and one may not be able to exit the investment quickly. Unlike stocks or urban property, agriculture land is a means of livelihood for farmers, and cultural factors play a role in sale dynamics. Investors may unknowingly offend local sensitivities and be at a loss – to understand and also monetarily. Land also carries the risk of being acquired by the Government for industrial or infrastructure development.

Farm income is unpredictable at best. One must factor in the vagaries of nature — weather, rain, drought and pest infestation. And even a bountiful harvest may not be good news as sale price may be depressed due to over-supply.

As with any investment, buyers need to understand the dynamics of the asset and only bite off what one can chew. Also, there are good and bad deals in any market and one must use caution in sifting the grain from the chaff.

>meera.siva@thehindu.co.in

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