Portfolio Diversification: How Thoughtfully Selected Land Can Complement a Broader Investment Portfolio
One of the most fundamental investing concepts, diversification involves allocating investments among asset classes that do not perform in the same direction and at the same time, with the goal of lowering the entire portfolio's risk level. The typical constituents of such a discussion are usually equities, bonds, gold, and real estate. Land, as a specific component of real estate, is not as well known but has a definite structural function, and it will be important to understand before deciding whether — or how much — it should be included in an overall portfolio.
Why Diversification Matters in Investment Planning
The basic concept of diversification is simple – asset classes move in different ways when interest rates rise and fall and when the market mood shifts. If a portfolio is mainly invested in one asset class, then it is more vulnerable to an overall decline in the market for that class, a dip in one specific sector, or a liquidity shortage of one asset type. The purpose of diversifying across asset classes with varying risk and return profiles is to reduce overall portfolio volatility over time, but not eliminate risk.
Where Land Fits in a Diversified Portfolio
Low Correlation with Financial Markets
Unlike stocks and bonds, land values are largely influenced by local factors, not the daily mood of the market or interest rate announcements. This tends to make land less volatile in the short term than the financial markets, part of the reason why it is not typically regarded as a way to diversify investments instead of investing in equities or debt.
A Tangible, Inflation-Resistant Asset
Land is a finite and physical asset that is often mentioned as a hedge against inflation because the amount of land in a specific location cannot be expanded, unlike other assets such as money or housing constructed. While this is often given as a reason for allocating land, it is not a certainty of value loss; local demand and/or regulation changes could cause land to stagnate or decrease in value.
Lower Holding Costs Relative to Built Property
In many states, undeveloped land (including farm property) has lower recurring costs than apartments or commercial property — no land maintenance costs, no structural depreciation, and only a nominal land revenue charge. This results in relative simplicity of ownership of the land as a long-term, lower maintenance investment as opposed to a long-term management and tenancy cost profile.
How Much of a Portfolio Should Go Into Land?
The amount allocated is not universal and will vary according to the investor's liquidity requirements, investment time frame, current asset portfolio and risk appetite. Financial advisors usually advise against buying too much of any one non-liquid asset class, including land, as it will often take a longer time to sell the land than to sell listed securities. A specific percentage is not appropriate to apply to this question and it's best answered by a qualified financial advisor that can examine an individual's entire situation rather than use a generic percentage.
Types of Land-Based Diversification
Residential Plots
It is also relatively more liquid and accessible for financing (as home loan is generally available) than agricultural land, as plots are available in approved layouts with RERA registration and in the approved layouts, the homes are also more accessible.
Farmland
Agricultural land, especially in peri-urban zones in relation to growth areas, would provide a low entry cost and would also provide the advantage of capital gains tax benefits that are favourable for the sale of rural agricultural lands (in several states) not classified as a capital asset in the Income Tax Act. It usually has less liquidity than residential plots, though, and doesn't qualify for conventional financing for a home loan.
Planned Land Communities
Between these two extremes lies organised gated land development where some or all plots are defined in size and have more detailed documentation than a single agricultural parcel and the development is often still described as an agricultural or semi-agricultural land parcel depending on the state and the project. This category includes some developments like Terravana Aravalli that are located on the border of Rajasthan and Haryana, near the existing growth corridors, and attract investors who are looking for land exposure and a more organised ownership network than the piecemeal ownership of agricultural parcels.
Risks of Over-Concentrating in Land.
• Illiquidity: Land, particularly agricultural land, can take considerably longer to sell than listed financial instruments or even residential property.
• Risk of concentration: When an investor invests a large portion of his net worth in a particular geographical region, he/she is at a higher risk of changes in the economic and regulatory environment in that area than in others.
• No income generation: Land does not provide a steady income stream like dividend-paying stocks, bonds or rental income may.
• Regulatory dependency: Future use, particularly the shift from agriculture to non-agriculture, relies on approvals that are not assured to be fast or predictable, and may only be granted at the discretion of the government.
How Experienced Investors Approach Land Allocation
Land investors who invest in land in a way that differs from a speculative bet, usually employ the same investment diligence they use when investing in other asset classes such as checking the title and documentation in great detail, understanding what type of land is liquid and what is not, sizing the allocation relative to their overall portfolio and never investing more than necessary to land an allocation. If you are thinking of organised developments such as Terravana Aravalli, the same rule goes — you must check the underlying land title, project documentation etc. and not just take the word of the location advantages.
Conclusion
Farmland and plotted developments can have a legitimate place in a diversified investment portfolio — with lower correlation with the financial markets, relatively lower holding costs, and a tangible and finite asset profile. But, it's not a substitute for a good financial plan, nor does investing in land make investing risk-free. The amount of land exposure is a separate issue from any other allocation decision and should be decided on an individual basis and not in a blanket fashion, in conjunction with a qualified financial advisor.
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