Owning of farmland

02.06.2017 Buying agricultural land may be a tempting proposition. But there are many caveats to be kept in mind. Dreaming of owning a piece of farmland some day? You are not the only one!

Over-crowded cities, high levels of pollution and soaring living costs are making many well-heeled city folk wonder if the grass is greener on the other side. Buying agriculture land not only augments income but also provides a weekend getaway from the grind. The appreciation in value of the land can be the icing on the cake.

Investors are now looking at farmland as a long-term investment. The attractions for investing in a farm could be many. For one, the cost of land in rural areas is typically lower compared to urban areas. Two, land is usually seen as a safe investment as prices appreciate over time, especially with infrastructure improvements.

Three, unlike a residential plot of land, you may be able to generate income from the farm. Food prices tend to keep up with inflation and farm income can be an inflation hedge. Income from agriculture is exempt from income tax and the capital gains from rural land may also qualify for tax exemption.

Four, a positive pay-off for many people in owning a farm is access to quality produce. This assumes significance given the concerns around usage of chemical fertilisers and pesticides.

Investment types

Based on your needs, commitment and holding period, there may be a few factors to consider. One, you need to decide if you plan to just buy and hold or do farming. If your aim is capital appreciation, you must consider factors such as road access, infrastructure improvements and economic development in the area.

You can get sizeable price appreciation due to urban sprawl if the city’s boundaries stretch over your land, over time. Returns may be high in this approach, but so are the risks — encroachment, government takeover of land, issues in converting arable land to residential plot and illiquidity with larger holding.

However, increasingly, buyers are less eager to turn farms into plotted layouts. An option you can consider is agriculture land with a farmhouse. Farmland typically has lower floor space index

(FSI) – 0.02 of the land area can be constructed. You can relax over weekends or even earn income by renting out the property.

You can also consider growing produce on the farm.

City buyers may lease the land to a local farmer or farm manager who provides a fixed lease payment or shares a portion of the profit (in cash and produce). Also, rather than going it alone, join with a group of like-minded people to buy a larger piece of land. You can share expenses and monitoring responsibility. Groups have also been known to take up initiatives such as organic farming for own consumption or for sale.

Know the restrictions

After you decide to buy land, the next step is deciding how much. If you plan to do farming, you may need a sizeable amount to make it profitable. Buying and managing less than five acres of land may lead to losses and it may be advisable to pool with other likeminded people to buy, say, 30 acres, advises J Ramesh, a property developer who owns farmland near Chennai which he actively manages. He says that a third of the land may be needed to maintain cows, a third may have to be left fallow or to grow fodder for cows and one-third is where you can do farming at any time.

Before you set out to identify your own farmland, there are many issues to sort out. For starters, you may not be allowed to buy farmland. For example, in Himachal Pradesh, only an agriculturist from the State can buy farmland. Karnataka and Gujarat also restrict ownership of agriculture land to State-based agriculturists. Also, Persons of Indian Origin (PIO) and Overseas Citizens of India cannot purchase agricultural land, plantation property or farm houses.

Two, there may be restrictions on how much land you can buy. States such as West Bengal have a ceiling that limits the land size held by a family, says Devajyoti Barman, advocate, High Court of Calcutta, associated with Kaanoon.com. Other States such as Kerala and Uttar Pradesh also have different maximum holding limit. 

Note that agriculture is a State subject and the laws vary between States. For instance, in Maharashtra, you can buy land only if you own agriculture land anywhere in the country, says Shyam Sundar, a Chennai-based advocate. Additionally, local panchayats may place restrictions on sale to outsiders — those not from the village.

Three, if your idea was to earn windfall gains, you need to check if it is likely that the land may be reclassified from agriculture purposes. Agri land is typically classified into wet land (cultivable land with irrigation sources) and dry land (not suitable for cultivation). In many States, Government policy only allows conversion of dry land for nonagricultural purposes and conversion of arable wet land may be very difficult. Typically, the district collector is the authority for reclassification of land. But the rules for conversion vary from State to State and from time to time. It may also involve long delays.

Assuming you are in the clear and have zeroed in on a farmland to buy, you need to check basics such as water availability, road access and affordability of the land. Then starts the typically lengthy process of legal due diligence

including determining ownership.

Ongoing management

Buying agri-land is only the start. Farm management is not easy and you may have to enlist the services of experts. There are other expenses to budget for as well. For instance, you may have to spend on infrastructure such as pump, solar panel, irrigation system or improving soil before you can see returns.

An acre of land may require ₹5 lakh of investment, says G Natesh, a former income tax official who runs a farm near Chennai. He advises budgeting 6070 per cent for land, 20 per cent for one-time expenses and the rest for operating expenses. For instance, if you plan to do organic farming, you may have to spend on buying cows, building sheds and for ongoing upkeep. There are also labour costs; other recurring expenses include input costs such as seeds, fertiliser/pesticide as well as transportation. He says these expenses may be about ₹60,000 per acre per year; and it may take about three years to reach break-even.

You may also want to invest in technology. For example, there are IoTbased solutions to provide information on soil moisture and other statistics. There are platforms to procure inputs and sell output as well as farm planning software to consider. Solar power pumps, drip irrigation, weather-related data analytics and farm equipment may be other investments to consider.

What you plant depends on a host of factors including what grows in the area where you own the farm land. Vegetables and cash crops may yield immediate but unpredictable returns while growing fruit and nut trees may provide late but predictable returns. You can also consider planting bamboo, dairy farming and poultry. You may also take the help of organic farming consultants to advise you on what to grow, how to manage pests and solve other issues.

You need to have a good arrangement to ensure the farm is well cared for. Watering and taking care of livestock is a lot of work and dedicated people are required to manage this. You can work with farm managers who may take a share of revenue, say, half the revenue.

Sandeep Saxena, founder of Big Farms, who manages hundreds of acres of leased farm land, says that using an integrated approach — of growing vegetables, grains, pulses, trees, flowers, dairy, honey-bees — of developing a forest is an idea to consider. Reducing input costs and labour, improving market access to earn better margins, are important over the long term. But, all these take time and seeking quick returns may lead to disappointment.

Reaping returns

Farm profit depends on the type of crop, size and fertility of the farm; typical numbers may not be representative. Resourceful investors may earn higher profits by cutting out middlemen and selling directly to the consumer. While profits per acre of ₹15,000-50,000 for orchards and staple crops have been reported, it is also common for returns to be negative. Urban farmers note that sustainability is a good goal to work towards in the first five years.

Developing infrastructure such as water source, improving soil quality and creating trees that can produce longterm revenue can all add to the capital returns you can earn from a farmland. Natesh notes that returns can be in the range of three times the investment over a ten-year period.

Farmland is an illiquid asset and one may not be able to exit the investment quickly. Unlike stocks or urban property, agriculture land is a means of livelihood for farmers, and cultural factors may play a role in sale dynamics.