Water – The Hot New Real Estate Investment
Water is the new hot real property investment and billions of dollars are flowing
Billions of dollars are flowing into real estate by value investors looking for productive land with secure water rights. It’s a hot long-term investment and our research will help you understand how to spot where water is a motivating factor in a buyer’s decision.
Water adds to the attractiveness of any property deal. Water is what we call a buttress resource, absolutely essential for every kind of property use and generally less transact-able on its own. Water is impactful as a real estate niche. Where you find properties with water rights you find an opportunity to provide valuable insight to turn prospects into leads and develop long-term relationships with buyers.
Agricultural land is a smart strategy to invest in water
Do you remember the move “The Big Short”? If you haven’t watched this I highly recommend it. It’s about the 2008 market crash. A savvy investor named Michael Burry did a lot of research and discovered a market moving trend in real estate. He ended up making billions by shorting the US housing market.
Michael Burry realizes that a number of subprime home loans are in danger of defaulting. Burry bets against the housing market by throwing more than $1 billion of his investors’ money into credit default swaps. https://g.co/kgs/BuVXC5
At the very end of the movie are the words: “Michael Burry is focusing all of his trading on one commodity: Water.” But the viewer is left wondering how is he going to invest in water as a commodity?
“I believe that productive agricultural land with water onsite will be very valuable in the future and I’ve put a good amount of money in that…a significant amount at this point.” Michael Burry
We’ve all heard of the food-water nexus but I bet you haven’t thought about how that plays out as an investment strategy. What does it mean to invest in water?
Investors like Michael Burry appear to have taken a step back from the normal business of the water industry and noticed something interesting about the relationship of water to agricultural commodities. The water footprint of a crop is an indicator of “water rich” farmland, for example it takes 368 gallons of water to produce a pound of almonds. Investing in almond farms is a strategy to invest in water.
When Burry was interviewed by New York magazine about his water investment thesis, he stated that:
Transporting water is impractical for both political and physical reasons, so buying up water rights did not make a lot of sense to me. What became clear to me is that food is the way to invest in water” – Michael Burry
According to the segment, Burry is investing in almond farms. Why on earth is he investing in almond farms you might ask? Well, it turns out that growing almonds requires lots of water and when water shortages take place farmers will sometimes walk away which results in even less supply of almond growers, and therefore almonds.
What Mr. Burry noticed about the transportation of water is so insightful. There are real challenges to develop wet water for delivery to an end buyer. It’s one of the most complicated and specialized businesses out there, which is why real estate developers are increasingly looking to water developers to take care of this requirement. Even in places with large established water utilities, developers of residential and commercial properties may be required to provide the water rights before receiving building permits.
Successful water development generally requires huge upfront capital investments and years of relationship building. Investors in these projects may change over time depending on their risk reward tolerance. Ultimately success is only hurdled once the water starts flowing, a common term used for this is “perfected”.
I’ve seen projects that took 10 years to position themselves in the market, in possession of executed contracts in place with a buyer, encounter significant and long delays between the time of contract execution and perfected revenue. These kinds of delays can cause investors to get very jittery. All that said, once the water starts flowing they are remarkably stable revenue generators with end user commitments that can last 100 years.
Investing in farmland is in many ways a much more attractive proposition for an investor that needs immediate profit, through the sale of the agricultural crops or livestock, and a long-term value play on the ownership of the water and land.
What’s the value of agricultural land with no water?
Those of us that work in water will be the first to tell you there is risk. Smart investors know there is risk in the longevity of the available water supply if they invest in agricultural land. Evaluating the certainty of water supply requires local expertise to provide the best information available to determine the “firmness” of water.
Firmness involves both the legal producing rights and physical available resources (a combination of the weather and storage reserves). The best first step to gather water rights and asset information is to research known water rights on and surrounding a property of interest. This is why we built https://waterninja.com/sales/, to make quick work of otherwise really painful research. We add to our database all the time so if there is place you need information get in touch with us.
80% of farmland is owned by non-farming investors!
Long-term investors see farmland as a way to invest in food demand. As a direct result these investors are heavily invested in water. Investing in water through farmland is a strategy employed by large institutional investors.
In the past several years, institutional investors and a handful of publicly traded real estate investment trusts have poured…billions into agriculture properties nationwide.
Over the past 25 years, the annual return on farmland has averaged 11.5 percent, according to the National Council of Real Estate Investment Fiduciaries’ Farmland Index. That’s nearly 4 percentage points better than the Standard & Poor’s 500 averaged over the same period.
That helps explain why non-farming landlords hold roughly 80 percent of the 353.8 million acres farmed in the United States, according to the U.S. Department of Agriculture. Those landlords collected $31.2 billion in rental income in 2014.
The geographic extent of farmland as an investment is breathe taking. Take a look at the analysis we did on the percent of land acres in each county categorized as farm land. Every bit of color on the map shows agricultural land. Red is the color for those areas with the highest percent of land in a county dedicated to farmland.
Source data: https://www.agcensus.usda.gov/Publications/2012/index.php#highlights
When you take into account federal government land ownership, the percentages for the entire western United States are actually more attractive than it seems from this map because the federal government owns a lot of property in the west. In Nevada, for example, the federal government owned 56.7 million acres in 2017 according to the Department of Interior (https://www.nbc.gov/pilt/counties.cfm), this is about 80% of all the land in the state of Nevada!
Ownership is a broad term. In its strictest incarnation ownership means full title to use and dispose of something. Control over the natural resources can be transferred to another party for use and profit without title transfer. In fact, this is the basis for most surface water transactions which are also considered to be commonly accessible but held in title by the government. (Government means federal, state, local, regional, and special districts.)
Productive Farmland with Water is a Smart Investment
Long-term investors see farmland as a way to invest in food demand. And they are investing in large dollars. Take a look at the example of TIAA. The Teachers Insurance and Annuity Association of America (TIAA), formerly TIAA-CREF, is a Fortune 100 financial services organization that is the leading provider of financial services in the academic, research, medical, cultural and governmental fields. TIAA has over 1 trillion dollars of assets under management.
In 2014 and 2015, investment funds spent more than $2 billion on U.S. farmland, according to Institutional Investor…Last year [2015], TIAA-CREF raised $3 billion for a global farmland-investment partnership, upping the firm’s farmland total to more than $5 billion.
Despite those sorts of numbers, institutional investors have yet to make a big dent in domestic farm ownership…It’s estimated that institutional investors own less than 1 percent of the U.S. farm market. But experts say that share is growing, partly because so many farmers are reaching retirement age… lots of times, the people selling come from the same generation that’s selling to commercial developers.
Investing in water through real estate is a core motivation behind a pool of deep pocketed buyers. There are an estimated 30 million properties with water features and rights. Understanding the power of water in the buyer sales funnel can help you begin to spot when water can be a successful niche to help you close more deals.
