Productive land is the ultimate hard asset. Unlike a lot in a development community or a plot in the middle of a commercial district, productive land always retains the potential for yield. By definition, productive land is land where you could produce something of marketable value. When whatever you plant or herd reaches maturity, you harvest and sell. Productive land also provides diversification and can be part of a legacy wealth plan.
This can be about farming, but I'm not suggesting you pick up a hoe. You have good options for taking advantage of this classic diversification strategy without ever getting your hands dirty. Specifically, I recommend three productive land investments that you can participate in without having to learn much of anything about how to grow and harvest crops: timber (specifically teak), coconuts, and farmland.
Yesterday, I showed you why Uruguay is one of the world's most interesting places to invest in farmland. Today: timber.
Historically, timber has enjoyed the best risk/reward ratio of any investment sector. Depending on whose chart of historical returns you consult, timber as an asset category has produced an annualized ROI in the range of 12% to 15% per year every year since they started keeping records of investment risk versus return. A friend calls timber "a long-held secret of the world's wealthiest people." It's a low-volatility hedge against inflation and an asset class that operates independent of the stock market.
On top of this, timber is a commodity that will always have a market and that doesn't have to be harvested at a particular time. That means that, if prices for your wood are less than you want or expected them to be, you can leave your trees in the ground so they can continue to grow until prices reach a level you like better.
Here's how a direct timber investment should work: You buy the land. A management company plants trees on it and maintains them for you. They take care of everything--from insect and weed control to thinnings--until harvest time. Come harvest time, the management company organizes the cutting and the sale of the trees. The revenues from the harvest go to you, as the owner. After the trees have been harvested, you still own the land, meaning you can replant and start the process over for another harvest.
I'm over-simplifying, but the point is that you want to be buying the land, not only the trees. Your returns can be good, even better, investing in trees alone, but, in the end, you are subsidizing the land ownership for the tree farmer. Once your trees are harvested, you're done, left without any residual asset, and productive land is all about the long-term hard asset. You also don't want to be buying shares of the operating company that owns and manages the land and the timber. Buying shares, again, you're undermining the opportunity you're meant to be capitalizing on, buying not a real productive asset but into a company. You have no control over the land, the timber, or how the business is operated. The only thing you control is the timing for when you sell your shares, and, once they've been sold, you're left with nothing. A productive land investment should always leave you with something.
For my money, teak is about the surest timber investment you can make. It is indigenous to only four countries--Burma, Thailand, Laos, and India. For centuries, the kings of Burma and Thailand considered teak a royal tree. Today, Burma, home to the last remaining natural teak forests, all of which are the property of the government, is the largest global exporter of premium teak, producing about 80% of world supply. These remaining natural forests are being logged at a rapid rate. Some predictions are that Burmese forests could be logged completely in the next few years, meaning the growing world demand (for outdoor furniture, flooring, boats, etc.) would have to be fulfilled by teak plantation production. And, right now, there aren't a lot of teak plantations worldwide.
While trees take years rather than months to grow to a harvestable size, they also can carry less risk of being completely wiped out than, say, a tomato crop. Teak trees have been farmed in plantations for hundreds of years starting with plantations in Southeast Asia. Today, teak plantations can be found in a band around the earth between 20 degrees north and 20 degrees south of the Equator. This includes Southeast Asia, India, Central America, Brazil, and parts of Africa. In addition to the required climate, you also need good soil to get decent growth rates for teak and a definitive dry season of at least four months. The dry season is when the hardwood in the center of the trees is made. Taking a look at a world map and all things considered (the ideal growing requirements, the ease of investment, the cost of investment, the opportunities for investment, and the tax implications), Panama jumps out as a top choice for investing in teak. This country is one of a handful of places in the world where you can grow premium teak trees. In addition, Panama is very pro-investor, home to a number of managed plantations, and, because it is interested in promoting forestry, makes the proceeds from related investments tax-free.
Owning a couple of hectares of teak trees could be a very profitable concept. At the same time, owning a couple of random hectares of any kind of tree doesn't make much investment sense. For this kind of investment to work, you need trees that are managed professionally by an outfit with both experience growing and harvesting the crop in question and access to a ready market for the end product. Few of us are prepared to invest the time that would be required to understand the industry and actually run the farm. I've known investors who have simply planted some teak trees and left them to grow. The results have never been good.
Perhaps the biggest drawback to investing in trees, teak or otherwise, is the investment term. Unlike cattle, for example, which mature in less than a year and then can be taken to market, you have to wait 10 to 25 years before you see any real return from a timber investment. Eucalyptus matures in maybe 13 years, pine in 15 to 20. It can take as long as 25 years before teak is ready for harvest, meaning it is definitely a legacy investment, made as much for your kids and grandkids as for yourself. Thinnings are done several times during the growth cycle, but they bring limited revenue. The full harvest is done sometime between year 17 and year 25, depending on growth rates, which depend on soil and weather.
While you generally have to wait at least 17 years to harvest teak trees, that doesn't mean you have to wait that long to cash out of your investment. Investors with shorter time horizons look to purchase established plantations. If you find yourself needing or wanting to cash out of your teak plantation before the full harvest, buyers are out there. This is a more liquid market than you might imagine. The reverse is also true. If you are looking for a shorter investment period, you could buy an older plantation. This strategy shortens the investment horizon but requires a larger initial investment. Your annualized returns can be about the same.
As I mentioned, several managed teak plantations operate in Panama. The important thing to understand when considering an investment in any one of them is whether you, as an investor, take title to the land where your trees are growing. For most of the plantations in this country, this is not the case. One where you do take title to the land is United Nature, operating since 1993 and with about 3,000 hectares of teak under management. As an investor with United Nature, you could decide when to take the final harvest (though I'd say the sensible thing would be to take the management team's advice on this), and you could sell on your piece of the plantation whenever you wanted.
You can find out more about investing in teak with United Nature here.
P.S. Tomorrow part 3 of this series on the world's best productive land investment opportunities...Continue Reading:
In South America, Uruguay, in particular, stands out; about 95% of the land in this country is farmable. Until the start of this century, most of Uruguay's land was used for cattle. When farmers began to recognize the implications of the coming global population crisis, they switched from cows to soybeans. Because Uruguayans haven't farmed their land for 200 years, it's virgin. There's been no soil degradation as in more recognized global breadbaskets.
Foreign and local investors are treated the same in Uruguay, and there are no restrictions on foreign ownership or use of land. No exchange controls or currency restrictions either. Uruguay is a foreigner-friendly, investor-friendly place and, as a result, has enjoyed the highest foreign direct investment per capita of all Latin America for the past three years.
Uruguay sees even rainfall year-round, plus the country sits on the world's largest untapped aquifer. The climate is temperate, with four mild seasons. Farmers can raise two crops per year.
Uruguay's farmland market is transparent. The entire country has been mapped. Each parcel has an ID number. You can plug this number into a map (available online: www.prenader.gub.uy/coneat) to see the productivity rating for that piece of land. The system amounts to an MLS for farmland, making it very easy to compare all your options at once. The average productivity rating for the country is 100. A lower rating means you're looking at land suitable for running cattle only. You want land rated 120 or 130 or better. Price correlates to productivity rating.
What could you produce? Almost anything you could imagine, from agricultural crops (soybeans, wheat, rice, etc.) to cattle or sheep for dairy, forestry (eucalyptus, pine), vineyards, olives, blueberries... None of these is a new crop to Uruguay—5% of the world's meat exports come from Uruguay; the country has the two biggest paper mills in the world; and Uruguay is the world's sixth-largest exporter of soybeans and fourth-largest exporter of rice. If you're buying for investment, plant soybeans (to sell to China). If you're buying for investment and for fun, try a hobby crop, like blueberries or grapes.
You could buy 50 acres to tens of thousands of acres. One of the many unique things about farmland investing in this country is that there are brokers with access to available farm investment opportunities across the country. All things considered, a farm in Uruguay is one of the most turn-key, user-friendly land purchases you could make anywhere in the world.
What would you do with your land once you'd bought it? You could either rent it out or hire a farm manager. A farm manager is like a property manager for a rental property. He is the key to your success. In Uruguay, there are many professional farm management companies, meaning, again, your options are turn-key.
Prices for farmland in Uruguay range from $1,000 to $4,000 an acre ($2,500 to $10,000 per hectare). Again, this is tied to productivity rating. Buy as much of the most highly productive land you can (as opposed to more of lesser rated land) with the budget you have. The better rated land will hold its value. Your return will depend on what type of product you instruct your management company to farm. Agriculture will return 4% to 9% per year; cattle 3% to 6% per year; forestry 6% to 10% per year. The most productive land is to be found in the country's southwestern corner.
The option would be to lease out the land you buy. Your return this way is less but more reliable, at about 4% a year. Many people buy and rent out for a year. Then, when they're more comfortable with the whole idea, they hire a farm management company for the greater yield. Farm management companies charge 5% of gross sales or 10% of net income.
These returns don't include appreciation. Farmland in Uruguay has been appreciating at a rate of 10% to 15% per year and this should continue.
Taxes related to farm revenues are low. Regular corporate income tax is a flat 25% in Uruguay. However, if you have a farm producing less than $240,000 per year (this would be a farm valued at $1 million or less), you pay only a capped tax of $5,125 annually. Property tax on farmland averages 0.2%. There's no VAT on most supplies and machinery or on the sale of farm products.
Farmland in Uruguay can be both an investment and a lifestyle, even a retirement plan. You could buy a small working farm (say 10 to 15 acres) with a small house (say 1,500 square feet) for US$300,000 to US$400,000. Engage a farm management company to maximize the return from whatever crop you decide to farm while keeping perhaps some small field for your own hobby use.
For more information on making a productive land investment in this country, I recommend English-speaking attorney Juan Federico Fischer with long experience counseling foreign investors in his country. Reach him here.
Kathleen PeddicordContinue Reading:
Dec. 7, 2010:
"Kathleen, I just wanted to let you know that I am reading your book right now and enjoying it immensely. It is much easier to read than "Retiring without Borders," because it reads more like a story than a report.
"I just got back from Belize in October and was looking at the seminar you're holding there in February. I'm not sure if I will be taking my sabbatical/mini-retirement by then, but I am planning to move to Belize next year. After searching for Paradise all over the world, I think I've finally found somewhere that I'd like to try out to see if the fantasy in my head meets up with the reality of living overseas..."
--Mitch B., United StatesContinue Reading:
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Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 25 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring, and investing overseas in her free e-letter.
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