It is crucial to recognise that land equity investment, like all investments, involves risk. Statistics cannot wholly express these risks. As such, you should assess risk qualitatively as well as quantitatively.
Risks in land equity investing fall into two broad categories:
- Risks with an internal origin (i.e., related to a specific property and its management).
- Risks with an external origin (such as fluctuations in trade policy, extreme weather events, etc.).
Both these forms of risks can be managed or mitigated. We are able to add value for our clients by managing internal risks, and in fact the quality of our risk management processes regarding asset selection and due diligence, manager/tenant selection and evaluation and post-investment monitoring and reporting set us apart from conventional land agents. Despite our best efforts to minimise risks and maximise returns on your behalf, however, certain risks will inevitably remain.
Prospective investors and their advisers should give careful consideration to the risk factors mentioned below when evaluating the merits and suitability of a land equity investment. Under certain circumstances and with certain objectives in mind, land equity may be deemed an appropriate component of a diversified portfolio, although it may not be suitable as a complete investment program in isolation. Land equity investment is suitable only for investors able to properly understand and bear the risks of an investment.
The following summarizes the primary risks involved in land equity investing. It is not intended as a complete description of all the risks that might apply to such an investment, but should be carefully evaluated before making an investment.
General Investment Risks
The market value of land investments can go down as well as up. The land may be subject to pronounced or prolonged falls in value and you may get back less than the amount you invested. Past performance is not a guarantee of future performance, nor should it be used as a guide to future performance. Land equity investment may not be appropriate for all investors or investment objectives.
Mature markets tend to be less volatile and illiquid than emerging markets, but the risk is there. Political volatility and adverse economic circumstances may also arise, putting the value of land investment at risk.
Raw land investments may be illiquid under certain market conditions. There is no assurance that a liquid secondary market will exist for raw land at certain pricing points. Certain market conditions may compel investors to accept a lower price than they might wish for to achieve a sale within a shorter timeframe. If this price is lower than the price at which the land was originally acquired, this could result in losses. In particular, this scenario may arise in markets where the supply of productive land is high relative to demand.
Changes in government or government actions may affect income from land and land values. Under extreme conditions—such as during a severe global food crisis—governments may impose legislation that adversely affects farm incomes and values (export restrictions or price controls, for example). Protectionist international trade policies may also have negative affects upon farm incomes and values in certain markets. Governments may impose more stringent environmental regulations upon the agricultural sector, thus increasing compliance costs with possible negative consequences for farm incomes and values.
The value of tax benefits depends on individual circumstances, and favourable tax treatment may not be maintained if government legislation changes in the jurisdiction in which the investor or the land is situated or if the domicile of the investor changes.
Inflation or deflation may occur over the duration of your investment. If the returns on your investment are lower than the rate of inflation, this would reduce the spending power of the funds realised upon the sale of your investment relative to the spending power you might otherwise have achieved had you simply held cash.
Because any investment in raw land is denominated in the currency of the country in which the land is located, such an investment is subject to fluctuations in currency value. This is especially true if the investor is domiciled in a country using a different currency than the one in which the land investment is denominated. The value of the currency in which the land is denominated may change in relation to one or more alternative currencies. Factors that may affect currency values include trade balances, the level of short-term interest rates and other fiscal or monetary policy factors, differences in the relative values of similar assets in different currencies, long-term opportunities for investment, capital appreciation and political developments.