ASX shares or property? That's an age-old question for Aussie investors who want to grow their wealth in the most productive way.
One not-so-common domain of property is farmland.
According to a report from Rural Bank, the Australian farmland market has compounded in value in the past decade, outgunning the housing market.
Over the past decade, the national median price for farmland increased by 201%, Rural Bank data shows. In contrast, house prices have increased by 85% in the same period.
With the rapid growth in agricultural land value, it's no wonder to see brokers positive on ASX shares like Rural Funds Group (ASX: RFF). Let's take a closer look.
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Why has farmland done so well?
According to Rural Bank, the surge in farmland prices is due to several factors. Strong prices for agricultural commodities — like beef, wool, wheat, and sugar — have fueled demand for agricultural land.
The median price per hectare of farmland is also "closely correlated with the net value of farm production (NVFP) per farm", the report says.
Whereas "the last three financial years have been the three highest NVFP per farm years on record".
International buyers, along with institutional investors and superannuation funds, have also found Australian land appealing due to its relative affordability and productivity.
Looking forward, these drivers are expected to "keep supply and demand in balance in 2024 and support a plateauing of values".
This could mean a stable growth period, Rural Bank says.
Overall, while sentiment is expected to be slightly improved from 2023 and allow for some firm demand for farmland, it is unlikely that this will fuel a strong resurgence in demand to levels seen in recent years.
As a result, values are expected to proceed through a period of stability as farm businesses focus on consolidation after recent years of expansion
Rural funds: ASX share with farmland exposure
Rural Funds Group owns a diverse portfolio of assets, including orchards, vineyards, cropping, and cattle farms. It was trading at $2.08 per share at the market close on Monday.
As farmland prices continue to rise, the value of RFF's assets increases as well.
Analysts at Bell Potter rate the ASX share a buy.
According to my colleague James, Bell highlights the stock is trading at a discount to its market net asset value (NAV) of $2.78 per unit.
The broker says the discount "appears excessive", especially given the growth of land values within the agricultural sector.
Its price target on the ASX share is $2.40 apiece, implying a potential upside of more than 15% at the time of writing.
Bell also forecasts dividends per share of 11.7 cents for FY24 and FY25. At the current share price, this translates to a dividend yield of 5.6%.
Foolish takeaway
As the Australian agricultural sector continues to thrive, brokers say Rural Funds Group might be one to keep an eye on.
The stock is up 7% in the past 12 months.
