4 December 1997 Share market versus farm real estate

On October 20 Jack Hinden said that shares represent the best investment vehicle for a medium to long-term savings programme. John England's article on December 1 espoused an alternative view saying that residential property markets offer better risk-return trade-offs. We offer yet another investment alternative – farm real estate.

In a recent study, we analysed statistical figures from 1966 to 1996 and compared the performance of the share market versus investment in farm real estate. Data supplied by the New Zealand Stock Exchange and Valuation New Zealand indicate that the numbers are stacked in favour of farm real estate.

The graph shows land values rising at a sharper rate than share values. The figures indicate that a $1000 investment in farm real estate in 1966 would have grown to $25,000 in 1996, which is equivalent to a compound annual rate of return of 11.33%. The same $1000 invested in shares in 1966 would have grown to only $10,600 in 1996 or a compound rate of only 8.2%. Therefore, as a long-term investment, farm real estate is a better alternative than shares.

Taking a short-term view, farm real estate also outperforms shares. Aside from having lower rates of return relative to farm real estate, shares also exhibit more year-to-year volatility than farm real estate values as indicated in the graph below. Share values are close to three times more volatile than farm real estate values. This indicates that shares can be up to three times more risky than investments in farm real estate.

In conclusion, farm real estate not only offers better returns than shares, but also allows you to sleep better because it achieves this at a lower level of risk.

Dr Gilbert V. Nartea, Agribusiness Management Lecturer, and Mr Juan Pellegrino, Graduate Student, Department of Farm and Horticultural Management, Lincoln University, Canterbury, New Zealand