Thursday 5th March 2020
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The recent market corrections and the prospect of further interest rate cuts has inspired many investors to reassess the balance of their portfolios. Diversification is critical to investors seeking to weather volatile markets. Land based assets are a good option to add diversification to a portfolio. Land based assets have traditionally been lowly correlated with many financial market products and other types of real assets such as gold or other type of infrastructure offering investors a true diversification opportunity.
This low correlation is due to the different nature of how returns are derived and associated risks. A vineyard or orchard derives its returns from a range of different markets and as most products are exported, NZD returns tend to be supported by New Zealand’s floating dollar, when times are uncertain. In uncertain and volatile times, focusing on a long-term horizon is important. Land based investments certainly fit in this space with the investment time horizon generally being toward 10 or more years.
For example, significant long-term value can be created through land backed development projects. The challenge for investors is a delay in returns while the orchard is being established and capital gain only being realised when a property is sold. But the flip-side in today’s environment is the opportunity cost of waiting for these returns is lower than it has ever been. In other words, with current term deposit rates at 2.0-3.0% an investor is foregoing much less than historically.
One example is the Myfarm hop garden development near Nelson. As it takes some time to convert a dairy farm into a productive garden there is an initial two year wait for returns that start out low, but are then forecast to hit 14% p.a. as the garden achieves mature production (7 years). This is an example of taking the long-term view around a sector and being patient to achieve a higher return. The hop garden is also a completely different investment option compared with the listed company options on the NZX - offering true diversification.
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