Explaining how LandEx values farmland and forestland, how do we estimate annual returns and the assumptions behind it
When new lands are listed on LandEx, we mention an estimated annual return there, which is what we believe that land can earn over the next 5 years.
We get that number by using LandEx Predictive Analytics, a valuation tool we have developed that helps us understand which listings are worth bringing to investors and which are not.
At a high level, land is a store of value, with increasing asset inflation, this asset class will also see price appreciation which is where most of the returns are coming from. Land also has cash flow: rent in farmland and revenue from wood sale in forestland.
Putting it in practice
Estonian farmland
Farmland returns come from two sources
Rental income as land is rented out to farmers. Usually between 2-4% per year.
Price appreciation of land. LandEx Predictive Analytics estimates this at 9% per annum.
For Estonian farmland price appreciation, we use Southern-Central Swedish prices as an estimate as they share a similar geography. EU subsidies are trending in a similar direction and agricultural commodity prices are international. We estimate over the next decade Estonian farmland prices to close some of the gap with Southern-and Central Swedish land prices and be priced at c. 70% of Swedish value which will mean 9% returns on value appreciation.
When adding on top the rental yield we get 11-13% annual return when farmland is purchased at market value. If we are able to buy land below market value, the returns can be higher.
Estonian forestland
Forestland returns come from two sources:
Growth of biological biomass i.e. forest that is on the land. LandEx Predictive Analytics estimates this at 3% per annum, 2% increase thanks to trees growing and 1% increase in wood price.
Forest is valued by taking the m3 of various species of forest and multiplying them with the price we can sell that wood at based on current wood prices. For example for pine, this is EUR 37/m3. These prices change every quarter as new statistics come in.
Price appreciation of forestland. LandEx Predictive Analytics estimates this at 9% per annum. This is land without the forest on top.
Compared to Southern-Central Sweden, Estonian forestland prices are c. 3x lower although land quality is similar and wood prices across the Baltic Sea are equal. Swedish price appreciation can be significantly higher than the 1.6% forecasted per annum but even with this very conservative estimate there’s 9% price appreciation expected over the next 10 years.
Why is this a very conservative number?
Carbon cash flow is coming into land, with Estonia’s first voluntary carbon projects done in 2021. As land-based carbon capture mechanisms are the cheapest way to capture carbon, we should expect significant interest in doing carbon projects on land (reforestation and regenerative farming), bringing in significant amounts of capital to land-based businesses.
Warming climate is increasing biological yields in Northern Europe.
Ease-of-access to invest and liquidity through LandEx will further increase land values providing a premium to trades done on private markets.
How much should land be worth? As with all store of value investments interest rates, inflation and money supply should dictate the prices of LandEx land. We believe that LandEx land through ease-of-access, diversification and transparency could be seen as something that has yields similar to government bonds (0.5-2%), which means that current land prices have upside potential of 100-500% based on just adding ease-of-access and fractional investment (diversification).