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An increasingly scarce resource
Investing in equity and property are two of the more popular ways to grow one’s wealth, but there are alternative investments yielding similar returns that are often overlooked. Among these is agriculture land, which does not rate highly with investors, compared to buying brick-and-mortar. But what many may not realise is that while commercial and residential land prices have risen by 20% to 30% in the last five years, so too has the price of agriculture land.
Agriculture land refers to tracts suitable for agricultural production of crops and livestock, with parcels of over 100 acres categorised as estate land.
Purchasing agriculture land, though, is not for everyone. Only those with surplus capital or have accumulated other assets over time should consider this option.
“Looking down the road 15 to 20 years, you will probably see your investment in agriculture land multiply five times from what it was worth when you first bought it,” says Foo Gee Jen, managing director of C H Williams Talhar & Wong (WTW).
A point to note with this type of land is that it is purchased by the acre. If left raw, it will offer little in return for your investment.
In purchasing agriculture land, be guided by the same principles as buying development land. Look for land with good accessibility and high traffic.
For first-timers, Foo recommends starting small. “Start off with one acre somewhere in Pahang or Johor and cultivate it into a small orchard. However, unless you are a seasoned hand at farming, it’s better to buy land that has already been cultivated.” Investors, he says, must be willing to persevere.
Agricultural land is priced at up to RM80,000 per acre nearer to Kuala Lumpur. For more down-to-earth prices, one has to venture at least 60km outside the fringes of Kuala Lumpur, says Foo.
“Even Selangor is considered quite a mature market. Some agriculture properties in the state were already fetching RM40,000 per acre five to six years ago. It is almost impossible now to get RM80,000 per acre for a one to five acre parcel,” he says.
Investors new to agriculture property should look at Rinching in Semenyih or Pajam in Beranang, he adds
Agriculture land in the Klang Valley is scarce. “Some areas may also have certain restrictions, such as Malay reserve land or those gazetted as forest reserve. Plus, the city must maintain a green lung, however rare land becomes,” says Foo.
JS Valuers executive director Chan Wai Seen says agriculture land within the Klang Valley is very limited and average prices of agriculture land in Selangor “generally range from RM110,000 to RM180,000 per acre”.
“For large estate land that does not have the potential for development, the price could be lower at about RM60,000 per acre,” he adds.
For agriculture land in Raub, Pahang, prices range from RM40,000 to RM100,000 per acre.
The rising trend of commodity prices has stirred more interest among investors in agriculture land, says Chan.
The take-up rate is quite fast at the right prices, he says. “In many instances, there is a mismatch between the prices asked by the owners and the prospective buyers. There are also developers who buy agriculture or estate lands in established areas for development purposes,” Chan explains.
Agricultural property transactions in the country in 2010 posted 233% growth, with a total of 81,030 transactions worth RM11.4 billion compared with 40,587 transactions worth RM3.4 billion in 1993
Capital appreciation
What many may not realise is that agriculture land has appreciated at about the same rate as development land.
“The prices of development land in urban areas like Kuala Lumpur, Penang and Johor have shot up 30% to 40% within the last five years and so too have agriculture land prices in Raub and Temerloh in Pahang, for instance,” says Foo.
“Five years ago, a 1,000-acre tract of agriculture land in Raub would cost RM20,000 per acre. But now, prices range from RM60,000 to RM80,000 per acre.”
The rise in prices is in tandem with the country’s growth. Improved infrastructure and transport systems have made once remote areas in Pahang and Perak more accessible, which in turn has raised the demand for agriculture land there.
According to a real estate agent, four years ago, agriculture land in Kota Tinggi, Johor, was going for RM30,000 per acre, but the price has now doubled to RM60,000 per acre.
However, the rate of appreciation will depend on various factors. Land with development potential in Selangor has seen a faster increase, with agricultural land rising over 30% in the last five years.
Harvest yield
Despite the steady capital appreciation, what makes agriculture land worth the price is the yield you get from the harvest. Foo advises that it’s better to buy agriculture land that is already being harvested.
A good choice would be to select a soft commodity or agri-commodity that is in high demand, with the two obvious options in Malaysia being rubber and palm oil.
Palm oil price on March 28, was at RM3,481 per tonne while rubber price was at 1,142.75 sen per kg.
Oil palm trees generally take four years before they can be harvested while for rubber trees, they can easily take up to seven years.
WTW’s Foo says people investing in agriculture land should expect the first four to seven years to be without income.
Buyers could spend a lot to cultivate the raw land and spend years waiting for the harvest, but the value of the land could easily appreciate 30% to 50% after the first harvest, says Foo.
Tee Ping Lim, executive director of JS Valuers Property Consultants (Melaka) Sdn Bhd, says the average yield generated from a typical harvest would be between 4% and 5%, taking into account the original land purchase price.
“In 2007, estate land was going for about RM35,000 per acre in Melaka. In 2011, it went up 100% to RM70,000 per acre,” says Tee.
Tee says that in Melaka, there is hardly any raw agriculture land left as nearly all has been cultivated with oil palm and rubber, a testament to the appeal of agriculture in that state. As long as commodity prices continue to remain positive, agriculture land will continue to be in demand.
But like other investments, investing in agriculture land also poses risks and challenges.
This includes getting financing, with banks more cautious when it come to agriculture land. They usually consider loans of between 50% and 60%, which means a heavy downpayment is required.
If a buyer were to purchase a 10-acre tract of agriculture land worth RM300,000, he would have to pay a minimum downpayment of 40% or RM120,000. Although the yield from the harvest may be able to offset the borrowing costs, keep in mind that one would have to wait four to seven years to receive any returns.
Agriculture land also cannot be just left empty as the maintenance cost is very high. Trespassers and illegal squatters may move in and cause problems.
For novices, the government does offer assistance to cultivate the land. The Malaysian Agriculture Research and Development Institute offers advisory services and consultancy to entrepreneurs and investors in techniques, technology and management.
Conversion potential
Buyers who don’t want the hassle of planting or dealing with trespassers can choose to convert the land for residential and commercial development.
JS Valuers’ Chan says past transactions involving estate land in the Klang Valley have been mainly for development purposes. “Most of the large and successful townships such as Setia Alam, Alam Impian, and Bukit Rajah was previously estate land,” he says.
“Other notable transactions involving estate land include a 182-acre land near Puncak Alam acquired by Tiara Best Sdn Bhd, which is to be developed into an integrated industrial project. S P Setia also plans to replicate its Setia Alam development in Beranang while UEM acquired a 463-acre estate from Inch Kenneth Rubber.”
Chan observes that developers and plantation companies have become more interested in acquiring estate land. “Property developers focus on buying estate land to develop townships and expanding their landbank while plantation companies aim to improve revenue.”
The conversion process, however, is not easy. The National Land Code has restrictions on the conversion of estate land to development land.
Different states have different conversion procedures and conversion cost.
The costs vary according to land use as well. According to Chan, however, the time it will take to convert the land is very subjective and would vary on a case-by-case basis. “If one wants to convert agriculture land into a residential zoned development and there are no other issues, the process can sometimes take less than six months.”
Those looking at investing in agriculture land may be concerned about the uncertain economic conditions and consequently, the demand for palm oil. However, WTW’s Foo says they shouldn’t be unduly worried as there will always be a demand for commodities, and thus, plantation land.
For Chan, estate land is an attractive property investment. “In most cases, the price of estate land will appreciate in the medium to long term due to land scarcity, opening of new roads and highways.”
Whether it’s a retiree or passive investor, purchasers of agriculture land can hope to gain from value appreciation, yield from the harvest and the option to convert it to development land.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 904, Apr 2-8, 2012
