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Lesson 1 of 6 · 12 min
Raw land, farmland and timberland
Raw land, farmland and timberland are unique, illiquid, location-bound assets like real estate, but their value comes from the land and what grows on or lies under it, not from buildings, and only farmland and timberland add an income stream to price appreciation.
In short
- Natural resources cover soft commodities (grown: crops, livestock), hard commodities (mined or extracted: metals, oil, gas) and the land that produces them: raw land, farmland and timberland.
- Like real estate: unique assets with a fixed location, illiquid, few buyers and sellers, and an equity-style claim on residual cash flows.
- Unlike real estate: value depends on soil, climate or geology, not physical improvements; financing choices are narrower (mostly bank loans or private debt); and specialist knowledge is essential.
- Raw land earns only from price appreciation (and possibly lease income); farmland and timberland also earn from selling their output.
- Ownership: raw land mostly via direct ownership or partnerships; farmland and timberland also via REITs, and timberland via TIMOs that manage holdings for institutions.
What counts as a natural resource
Natural resources are the basic inputs of the economy. Soft commodities are things that are grown over a season or several years: grains, livestock and cash crops such as cocoa or coffee. Hard commodities are mined or extracted: copper, iron ore, gold, crude oil and natural gas. The third group is the land itself, held for farming, forestry, mineral rights or energy projects such as wind and solar farms.
Land is often owned directly. A family farmer growing barley and a pension fund buying forest in New Zealand are both direct owners. Large institutions also buy land with rights to drill, mine or build renewable-energy plants, and many do so partly to meet ESG goals such as water conservation or carbon reduction.
Indirect access has grown quickly: exchange-traded funds, limited partnerships, REITs, swaps and futures now let investors take exposure without running a farm or a forest themselves.
Land versus real estate: similarities and differences
Raw land, farmland and timberland share the core features of real estate. Every parcel is unique, it has a fixed location that affects its value, it is illiquid (a sale takes time and a specialist buyer), and the owner holds an equity-type claim on whatever cash flows remain after costs. Farmland, like let property, can also produce steady lease payments.
The big difference is what creates value. In real estate it is the buildings and improvements: actual, potential and planned. For land investments there is little or no focus on improvements. What matters is soil quality and climate (farmland, timberland) or geology (mineral and drilling rights).
Location matters for both, but in a specific way for land: transport to markets can be a large part of the price the final buyer pays for grain or logs, so land close to roads, rail and ports is worth more.
Two further differences: there are fewer financing options (mostly bank loans or direct private lending, versus the wide menu for commercial and residential property), and investors need specialist expertise in agronomy, forestry or geology. Institutions without forestry skills hire a timberland investment management organisation (TIMO), which analyses, buys and manages timberland on their behalf.
| Feature | Real estate | Raw land, farmland, timberland |
|---|---|---|
| Unique, fixed location | Yes | Yes |
| Liquidity | Low | Low; even fewer buyers |
| Main value driver | Buildings and improvements | Soil, climate, geology; access to transport |
| Financing | Wide range of options | Mostly bank loans or private debt |
| Expertise | Property management | Agronomy, forestry, geology (TIMOs for timber) |
A quick test: if you bulldozed every structure on the site, would most of the value survive? For farmland or forest, yes. For an office building, no.
Comparing the three land types
Raw land produces nothing by itself. Its return comes from price appreciation, perhaps topped up with lease revenue if someone rents it. Its main risk is the value of its best alternative use: if rezoning or new roads make development likely, its value rises; if not, it may stagnate.
Farmland earns from selling crops and other farm products, from lease revenue, and from changes in land value. Its return drivers are harvest quantities, commodity prices and the price of land. Its value rests on location, the crop growth cycle and soil quality.
Timberland earns from selling trees, logs and other forest products, plus leases and land appreciation. Its drivers are biological growth, harvest quantities, lumber prices and the land price. Its value depends on location, the quality of the timber and the stage of the forest's growth. Both farmland and timberland face weather, climate change and biological risks such as pests and disease.
Owners differ too. Farmland is held mostly by individuals and families, with some institutions; raw land and timberland are held mostly by institutions, with some individuals. Raw land is usually owned directly or through partnerships. Farmland adds REITs, and timberland adds REITs and TIMOs.
| Raw land | Farmland | Timberland | |
|---|---|---|---|
| Return drivers | Land price | Harvest quantity, crop prices, land price | Biological growth, harvest quantity, lumber prices, land price |
| Direct revenue | Appreciation, leases | Crop sales, appreciation, leases | Timber sales, appreciation, leases |
| Value depends on | Location | Location, growth cycle, soil | Location, timber quality, growth stage |
| Main risks | Best alternative use | Weather, climate, disease | Weather, climate, disease |
| Typical owners | Mostly institutions | Mostly individuals | Mostly institutions |
| Structures | Direct, partnership | Direct, partnership, REIT | Direct, partnership, REIT, TIMO |
Formula
- Holding-period return on land
V0 = value at the start, V1 = value at the end; income = lease payments or net crop/timber sales. For raw land the income term is usually zero.
Worked examples
Example 1 Raw land versus farmland return
An Australian fund bought raw land for AUD 500,000 and sold it three years later for AUD 560,000 with no income in between. It also owns farmland worth AUD 2,000,000 that earned AUD 70,000 net lease income this year while its value rose to AUD 2,050,000. Compare the annual returns.
Example 2 Real estate or land investment?
A Brazilian pension fund compares a shopping centre in São Paulo with a eucalyptus plantation in Minas Gerais. For each, what is the main source of value, and how is it likely to be financed and managed?
On the exam
Expect items asking which feature land shares with real estate (illiquidity, uniqueness) and which it does not (value from improvements), which return source raw land lacks, what a TIMO does, and which land type is mostly family owned.
- Saying physical improvements drive farmland or timberland value. They drive real estate value; land is valued on soil, climate and geology.
- Giving raw land an income stream from production. It produces nothing; its return is appreciation, plus lease income at most.
- Calling a TIMO an investment fund. It is a manager that selects, buys and runs timberland for institutional investors.
- Expecting raw land to be held in REITs. With no inherent income to pass through, it is usually owned directly or via partnerships.
Check yourself
Q1Which feature do farmland and commercial real estate most likely share?
Q2Which source of return is least likely available to an investor in raw land?
Q3A timberland investment management organisation (TIMO) is best described as an entity that:
Q4A raw land parcel bought for EUR 400,000 is sold after two years for EUR 441,000 with no income received. Its annualised return is closest to:
Q5Which ownership structure is least likely used for raw land?
Answer the 5 questions: +10 XP for each one you get right first time.
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