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With a possibility of another decline in the stock market, due to concerns of stocks still being overpriced and multiples still being high, and the recent boom & volatility in house prices concerning investors that prices make take a severe downturn, there is a demand in the market for alternative safe-haven assets that may be revenue-generating.
Fixed-income allocations such as Bonds, especially government bonds, have historically been considered a good opportunity for investors to earn a reasonable return. However, with long-term inflation concerns still high, and with international ‘artificial manipulations’ of bond yields by central banks, there are concerns that the long-term bull market in bonds may finally come to an end, raising investor’s apprehensions regarding bonds as vehicles for return generation and capital preservation.
In terms of safe-haven assets, precious metals such as gold, silver, copper, and even palladium have been considered a good investment for capital preservation by investors (see our in-depth reports on commodities , but there are problems with investing in commodities and precious metals: precious metals in the portfolio may be a good inflation hedge, nonetheless, metals do not provide an income; returns on precious metals also have been observed to have an inverse relationship with rising bond yields, i.e., when bond yields rise, precious metals fall, this makes them a precarious investment to carry in the portfolio when yields, in the coming years or perhaps sooner, may rise to curb the potential of cyclical inflation (Białkowski et al., 2015; Abdullah & Bakar, 2015).
In terms of mainstream investments, this means that we are left with very few alternative options with good value; one option that investors have been gravitating towards, especially with the attachment of Bill Gate’s name, is land. This report examines whether land is a good investment, especially in the provinces of highest investment interest: Alberta, British Columbia, and Ontario.
The main issues of importance in this analysis are the annual return on investment (ROI), the risk, and the future prospects. To examine these factors, 3 decades of land prices data from statistics Canada has been analyzed.
Ontario
1. Land prices in Ontario have appreciated by 5.89% yearly (average). This growth rate is about 9% lower than the national average of 6.46% appreciation p.a.
2. The average land price per acre in Ontario is $11,845 (2020)
3. Risk, as measured by the standard deviation of returns, is ±4.5%.
4. Land in Ontario, as per 95% confidence interval, should appreciate in the range of 4.1% to 7.7%.
British Columbia
1. Land prices in British Columbia have appreciated by 6.09% yearly (average). This growth rate is about 6% lower than the national average.
2. The average price per acre in B.C. is $6,382 (2020)
3. Risk, as measured by the standard deviation of returns, is ±5.3%.
4. Land in B.C., as per 95% confidence interval, should appreciate in the range of 4.1 to 8.1%.
Alberta
1. Land prices in Alberta have appreciated by 7.12% yearly (average). This growth rate is about 10% higher than the national average.
2. The average price per acre in Alberta is $2,999 (2020)
3. Risk, as measured by the standard deviation of returns, is ±3.4%
4. As per 95% confidence interval, Land in Alberta should appreciate in the range of 5.8 to 8.4%.
Should you buy land in Canada?
Overall, the analysis reveals that land does present a good opportunity, with a downside risk, as per 95% confidence level, of a slower yearly appreciation of about 3.5% in the worst-case scenario. The upside risk, i.e., the best-case scenario, is an 8+% of yearly appreciation. One might be concerned about the performance of this asset in an economic recession, for example, whether land prices would crash in a recession or depression.
A suitable period for assessment would be the 2008 & 2020 recessionary periods for the economy. Land prices in all three provinces grew handsomely in the 2008 financial crisis period (7% in Ont., 19% in B.C., 15% in AB., in 2008). Yearly price appreciation was above the inflation rate in the 2020 economic distress period as well.
In contrast, the S&P/TSX (Toronto stock Exchange) saw a decline of about -35% in 2008 and +0.66% return in 2020. The fundamental reason for this superior performance: land is considered a defensive investment, its demand increases as the risk associated with other asset classes such as stocks, bonds, etc., upsurges.
Here it may be argued that other assets, particularly gold, should be considered the first choice for a safe haven asset; however, the variance of gold’s returns is much higher than that of land. 95% Confidence interval for annual gold returns reveals a range of 0.88% to 11% p.a., the sample Standard deviation is 13.5%. This means that gold is a riskier investment compared to land (more than 200% riskier), as its lower end range of returns—0.88%--is lower than the long-term inflation rate of about 2% in Canada; this means that gold may yield negative real returns.
Gold is, nonetheless, a more liquid investment, one that is much simpler to manage, compared to land. But, depending on specific opportunities, land can be a safer (low risk) investment in Canada, as per the data (see report for further discussion).
(Gold average annual return and SD data attached at the end of the report)
Another issue with investing in precious metals is that they don’t generate revenue. Gold/silver only provide a return to the investor through a price appreciation and not through a reoccurring income such as stocks do with a dividend. This is not the case for land, however. Land can be rented, utilized for a development or farming, etc. While farming cannot be considered an ‘investment’ as it is more of a full-time job, there are some opportunities that can be considered passive investments, such as a tree plantation, renting land, etc.
While technically land is a superior investment, it is also worth noting that it is not a simple investment. While acquiring stocks, bonds, commodities, etc., can be a simple task with electronic brokers & trading, acquiring land requires far more effort. There are issues such as fertility, suitability, zoning, i.e., what can and cannot be done with the land, location, etc., that make it a complex investment, requiring a far greater effort on the part of the investor(s).
Receiving rent, depending on the land tenant, can be a concerning issue as well, and passive crops, while a good investment, always carry a risk of failure or loss at a later date due to natural causes.
Some investors may consider the ETF approach to gain exposure to this space. It should be noted, however, that the volatility, and thus risk, of the ETFs in this space is far greater than owning land; therefore, these ETFs cannot be considered as a precise proxy for land prices in Canada (see report for details on this point).
Lastly, it is worth mentioning that with other assets, arguably, still overpriced, an investor can gain some valuable, low risk & decent returns, by adding land to the portfolio. While it may be a demanding task to identify and acquire good opportunities in this space, the process can be streamlined with the assistance of specialist brokers.
See also:
References
Abdullah, A., & Bakar, M. J. A. (2015). The application of gold price, interest rates and inflation expectations in capital markets. International Journal of Economics and Finance, 7(2), 293-302.
Białkowski, J., Bohl, M. T., Stephan, P. M., & Wisniewski, T. P. (2015). The gold price in times of crisis. International Review of Financial Analysis, 41, 329-339.
Statistics Canada. Table 32-10-0047-01. Value per acre of farmland and buildings at July 1. DOI: https://doi.org/10.25318/3210004701-eng
Data: