MANAGED FARMS A NEW REALTY ASSET CLASS
Till now farmhouses were the alternative investment avenue for Indians that served as a weekend getaway as well In the last few years managed farmlands has gained traction among new age investors for investment and returns.
The reasons for the sudden popularity of managed farms lies in the downturn seen in the real estate coupled with the Covid-19 pandemic which has resulted in people looking for different avenues of investments.
Additionally, the recently amended Karnataka Land Reforms Act, 1961 now permits any individual or institution from non-farming background to own agricultural land. This has opened up the market for investments in managed farmlands.
A managed farmland is a system where individuals can put their money in a farm plot and then watch their assets grow without the hassles of having to manage it themselves. While the value of the land will surely appreciate, the high-value timber plantations or cyclic crop produce offers the investor return on investment. The comparisons are often made with commercial properties where rentals become a source of revenue for the investor.
As a general rule, agricultural land values are supported by the earnings derived from the asset itself. Debt-to-asset ratios remain low in the farming sector compared to other real estate asset classes. The landowner can grow crops of his/her choice or even grow a mini forest with timber trees. The proceeds from the sale of the crop can be enjoyed by the owners of the property for short-term wealth and timber such as teak and sandalwood can be grown.
Managed farmlands are farms owned by individuals but cared for by an experienced agency. They can be highly productive land parcels depending on the type of plantation and offer investor apart from capital appreciation a regular income from produce as well.
BENEFITS OF OWNING MANAGED FARMLANDS
By investing in a managed farm, one can not only create a passive income source but also contribute to the environment by providing a green cover that keeps replenishing itself. Especially in case of agroforestry, the trees increase the biodiversity and soil fertility of the region they are planted in. In addition, the investor gets to have an eco-retreat for the family to relax amidst the bliss of nature. The pandemic has made people realize the importance of health and has made them crave to be closer to nature away from the city life. Other important benefits include:
- Lower Price of Land: Since agricultural land costs much lesser than a city property, the investment is much lower. Also, the development cost of the land gets divided among all investors.
- High Return on Investment: The long-term return on investment is much higher compared to the returns earned on shares in the stock market or mutual funds.
- Non-depreciable Asset: Unlike residential properties, agricultural lands do not depreciate with time.
- Tax Exemptions: Owning farmland has advantages, one being that income earned from and gains made from selling the land are exempt from taxation.
According to a statement by Samson Arthur, Hyderabad Branch Director, Knight Frank India. “With the slump in urban realty and the costs still remaining inflated, people are turning towards this sector due to its long-term benefits. However, land policies of the state has a bigger role to play in the growth of this sector.”
Owning farmland has advantages, one being that income earned from and gains made from selling the land are exempt from taxation. But rules regarding agricultural land vary from state to state.
KEY FACTORS TO CONSIDER
Before buying farmland, one should know the relevant rules in the state. Also, there is a ceiling on the amount of farmland an individual can own, and it varies from state to state. The land ceiling restriction varies based on the type of land (irrigated/ unirrigated/ rocky) etc. A family can own more land jointly on various names.
“In some states, including Telangana, anyone can buy agricultural land irrespective of whether or not they are farmers, but in states such as Karnataka, only registered farmers or those from farming families can buy such land. Prospective buyers should be clear about how much returns they expect, whether they will do farming by themselves or lease the land to someone, and whether they want just a farm or also a farmhouse. One should know that farming is not such an easy activity, as publicised by some developers and middlemen. Also, rules and legal procedures regarding agricultural land change from state to state. Therefore, utmost care needs to be taken while investing,” cautioned Ram Reddy Gummi, President, Confederation of Real Estate Developers’ Associations of India, Telangana.
“The rules relating to the owning of agricultural land differ from state to state. For instance, it is very difficult to buy a farmland in Maharashtra if you are not from an agricultural background. Whereas that is not the case with states such as Telangana, Andhra Pradesh and Tamil Nadu. Over time, as a city expands and the urban limits end up absorbing the villages on the outskirts, people tend to invest in plots on the periphery. But this too should be a considered decision, because if the metro does not come close enough, land prices may not appreciate, and could even be seen to depreciate over time,” says Manish Ramjiyani, Managing Committee Member of the Confederation of Real Estate Developers Association of India – Maharashtra Chamber of Housing Industry (CREDAI-MCHI).
According to investment experts, buying agricultural land can be a good investment for high net worth individuals however, apart from the thorough due diligence while buying farmland, an investor should also have a clear plan for land management. Many a times, returns on farmland may not be as attractive as they seem. One should ensure that the land has a clear title, as farmland in most parts of the country is mired in disputes.
THE BUSINESS OF AGRO REALTY
Many start-ups in this segment have begun setting up and running agro-forest and agricultural communities. They manage the land transaction as well as the agricultural land development with full ownership and on record transactions. Smart farmland management comprises IOT technology, cloud computing, AI & real time sensors for best agricultural increased resource efficiency. Furthermore, the companies assure of not posing any challenge to agricultural land ownership and title, which is a common risk with individuals and firms and societies. Some companies also offer flexi payment plan to help own the asset.
Farm asset management companies like Hosachiguru, GoSmartAgro, Big India Farms, Hebbevu, Agrocorp Landbase, Beforest among others, help navigate the paperwork and minimise the risks and hassles of maintenance.
As per farms management companies, farmland provides a regular income to the investor, as it captures both operating and capital returns and appreciation in the value of the asset. The cost of owning a farmland depends on the land size, project type, and location. A farmland delivers higher risk adjusted returns than mainstream asset classes. In other words, farmland rewards investors with a higher level of excess return (‘risk premium’) per unit of risk.
- Be clear about what to expect from owning farmland
- Ensure that the land to be bought has a clear title
- Check the antecedents of the seller
- Rules in the state with regard to farmland should be known
- Make sure the land has good soil fertility and water availability.
- Keep realistic expectations as yields from farmland is dependent on many factors.