Billionaires have the kinds of investment choices that individual investors can't even dream of -- custom derivatives, private placements, even entire social media networks. So, what real estate sector are they flocking to now as inflation ramps up? Farmland.
Farmland may seem boring, but it is one of the best historical investments for inflation protection. Let's discuss which billionaires are investing in farmland, the case for it as an investment, and how you can get it in on it, too, with real estate investment trusts (REITs) Gladstone Land (LAND -0.91%) and Farmland Partners (FPI 0.40%).
Shahid Kahn started automotive parts company Flex 'N Gate in Urbana, Illinois but is probably more famous for being the owner of the NFL's Jacksonville Jaguars. Recently, a spokesperson confirmed that one of his entities had purchased 24,000 acres of farmland.
Urbana is smack dab in the middle of Central Illinois farm country, so Kahn should be very familiar with the investment. As of April 2021, Kahn had purchased $84 million of farmland across 10 Central Illinois counties. The purchases began in 2015, and he has likely purchased more since April 2021.
Our next billionaire is Bill Gates, who, with Melinda Gates, was the country's largest farmland owner prior to their divorce. Gates' investment management company has reportedly purchased over 269,000 acres of farmland over the past 10 years.
Finally, Jeff Bezos has recently gotten in on the farmland buying spree as well. Bezos blew past Gates' levels of ownership earlier this year and now owns 420,000 acres of farmland.
The case for investing in farmland
The best case right now is that farmland is inflation protection. Farmland is leased to a farmer with contingencies for rising prices. If food prices skyrocket, as they are right now, the lessor gets to share in the windfall profits.
Of course, all businesses with primarily fixed costs hope to see windfall profits as prices go up. What sets farmland apart is the elasticity of the demand curve. When food prices go up, people can't stop eating. In many industries with elastic demand, when prices go up, demand drops. When the food prices go up, people will start to conserve more, but demand shouldn't drop nearly as much.
Inflation protection isn't the only reason to invest in farmland. The asset also allows investors to diversify their portfolios. The less correlated your various investments are, the more consistent your returns will be over time. According to a white paper by fund manager Nuveen, farmland has had consistently positive returns and higher yields than the most popular government bonds during the past four US recessions. It also has lower average volatility than both US stocks and 10-year treasury bonds since 2007. If the stock market crashes, farmland may also take a temporary hit, but it likely won't end up in the same bear market.
How you can get in on farmland
Unlike custom derivatives and entire social media networks, there are ways for individuals to invest in farmland. The most popular is Gladstone Land. Gladstone owns over 110,000 acres of farmland across 164 farms. Its stock is up almost 70% over the last six months as investors have piled in for inflation protection.
That doesn't mean it's a bad value today. The dividend yield is still 1.4%, and it trades for just over two times book value. Remember that its book value is based on the price it paid for farmland. According to a recent management presentation, the value of some of that land could be up 162% since 2000.
As food prices continue to increase, Gladstone's profits will follow, and more investors will likely buy farmland, pushing the prices of its assets up as well. Profits and assets both give the company more capacity to build its portfolio and continue to grow.
Farmland Partners is another way to get exposure to farmland. It is a more vertically integrated option. In addition to owning 160,000 acres of farmland, it also recently got into the farmland management business (it currently manages another 26,000 acres) and will manage farmland auctions and brokering as well.
Farmland Partners has the same exposure to increased food prices in its leases as Gladstone, but it also has more direct exposure to both rising food prices (with the land it manages) and rising farmland prices (with its auction and brokerage businesses).
It's worth noting that neither of these REITs has been a perfect vehicle for farmland investing so far. Farmland Partners spent years in a legal feud with a short seller that published incorrect information. Gladstone Land has remarkable returns over the past year or so, since inflation fears started to ramp up, but it lagged the market in the seven years before that.
It's possible that the two REITs will be duds unless there are substantial macroeconomic headwinds (like rising food prices) to attract investors. It's also possible that recent events have given the companies the catalyst they needed to move into a new growth phase.
Diversify, diversify, diversify
If the No. 1 rule of real estate investing is "location, location, location," the No. 1 rule of investing, in general, should be "diversify, diversify, diversify." Farmland offers investors the opportunity to not only protect their portfolios from inflation but also potentially shield returns during other market crashes as well. Billionaires are investing in the sector, and if you can handle market lagging returns during bull markets, Gladstone and Farmland Partners could offer bear market protection in your portfolio as well.