As a person who spends his days talking with people about how to invest their hard earned money, I have had quite a hard time trying to change people’s mind on the dynamics of land as an asset class.
Even on my Timeline, whenever I share something about land, there seems to be a camp that cannot change their mind regardless of what facts, analogies, statistics or supporting reasons that you present to them. They are die-hard fans of investing in land.
Moreover, if you eavesdrop on conversations of young people who have just started their careers, the first asset class they want to add to their portfolio is parcels of land.
In this article, I share my thoughts on land as an asset and how it affects your portfolio
No One is Crazy
In the Psychology of Money, Morgan Housel writes,
“But every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. They tell themselves a story about what they’re doing and why they’re doing it, and that story has been shaped by their own unique experiences.
We all do crazy stuff with money because we’re all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy, we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.”
As Morgan Housel highlights, no one is crazy with their financial decisions. We all make financial decisions based on our background, our experiences and our thinking of how the world works. And most importantly our knowledge or understanding of what we are doing at that particular time.
The reasons why many Kenyans see land as the only prime investment are many, but we touch on a few:
Reasons That Make Land Attractive
1. Vigorous Marketing Campaigns by Real Estate Companies
If you check adverts in our radio stations, TV stations, Newspapers, and even what influencers are pushing, you will find land adverts everywhere.
Land has been glorified and wrapped by media companies as the prime investment that anyone with savings should invest in.
2. Land is a Fixed Resource
It is limited in supply. They are no longer making more of it. Unless you live in countries like the Netherlands that are reclaiming land from the water bodies, the supply of land is fixed.
However, that isn’t a good enough reason to hold onto a piece of land just because it is in limited supply. In your lifetime or during the period when you anticipate holding onto that piece of land, there may be no demand for land in that area.
3. It’s a Lazy Investment
Most people aren’t buying land for development. They are buying land to hold it for a few years expecting it to rise in value and then make capital gains.
4. It’s a Tangible Item
Due to the financial illiteracy levels in our country, it’s hard to convince someone to invest in bonds or stocks, things they can’t see or touch. But for land, it’s easier to convince someone since they can see the piece of land, they can own the title deed and it feels good narrating to your friends how many parcels of land you own.
5. Survivorship Bias
Every now and then, you will hear of people who made huge capital gains by holding onto a piece of land and then selling it for way higher prices than they bought it.
Hence, people end up glorifying the good side of land as an investment while hardly talking about the bad side.
And like most amateurs, people put their money in land thinking of all the good things that could happen. They don’t look at the bad side of things.
The stories you won’t hear are of people who have been unable to sell their pieces of land for many years, people who sold at losses, and even people who locked all their wealth in pieces of land but can’t liquidate since no one wants to buy them.
The Bad Side of Land
1. Land is a Solid Asset.
Land is one of those assets that can be very hard to liquidate when you urgently need cash. Even with a prospective buyer available, it may take months before you settle everything and have cash in your bank account.
The worst side of having your money held in a solid asset like land is when you urgently need to liquidate and convert your asset into cash. You will hear stories of people who have been trying to sell their pieces of land for years without any success.
Like Jason Zweig famously wrote,
“No matter how valuable an investment may be, it is of no practical value to you unless it’s liquid when you need to cash out. Just as travelers die in the wilderness without water, investors perish if they have no liquidity.”
Moreover, selling land as an individual is very hard. You have very little access to people who want to buy that parcel of land. You have limited friends, contacts, and networks. Even companies invest heavily in marketing & advertising to sell land and still struggle.
2. Undeveloped Land Doesn’t Generate Any Cash Flow
Stocks will give you dividend income, bonds will give you interest payments, undeveloped land will give you nothing.
The goal of investing is to buy income generating assets. This is to provide us with regular cash flows that with time can replace our active incomes.
With undeveloped land, you get none of that. You only have to live on the hopes that you will sell it at a higher value than you bought it.
3. How is Land Valued?
My conversations with a land valuer, property lawyer and a quantity surveyor left me with more questions than answers. First, the biggest factor in valuing land is location. In fact, it’s probably the only one that really matters. That will explain the recent news that an acre in places like Ruaka in Kiambu goes for Ksh 100M.
The land valuer was quick to inform me that when valuing a piece of land, they already factor in future prospects that may influence the demand of land in that area. Whether there’s a government amenity to be built around there or whether it’s prime land that the government has plans for development. That means that you are not buying the land for what it costs today. The future prospects of land in those areas have already been factored into the cost of that piece of land.
Hence, if you buy the piece of land, and there are no longer any good future prospects of land in that area, the cost of that piece of land may go down with the demand. Worst case scenario, is when the said future prospects like the government building an amenity do not materialize.
4. Land Scams
Most people don’t lose money in land by selling at a loss. They lose money through scams. I’m sure you’ve heard of people who ended up with hot air instead of their lucrative plots. Or buying land that doesn’t exist or finding more than two people claiming to possess the same piece of land.
Since land is a very hot investment in Kenya, and everyone with extra savings thinks of no other investment, land scams have been on the rise. True to the saying, “during a gold rush, sell shovels.”
How Land Affects Your Portfolio
1. If you are getting started with investing.
Land shouldn’t be the first asset you buy. For most people, it will always end up badly. If you are like most of us who haven’t inherited any wealth, you don’t have much money when getting started with investing, so locking most of your savings in a piece of land may be disastrous. This is because you still don’t have a lot of savings and you are most likely to liquidate your investments in the near future to meet a financial emergency or an unexpected financial need.
2. If you are approaching retirement
If you are approaching retirement, you want to first ensure your assets are generating enough cash flow that can sustain your lifestyle in retirement. Land doesn’t generate any. So you would be better off buying bonds or dividend stocks.
When land can be a good investment
Use it for Diversification
If you already have a decent portfolio and a solid financial foundation, you can think of putting some of your money in land. That means you have assets in your portfolio that you can easily liquidate into cash when the need arises. And you also have assets that are generating enough cash flows for you. That leaves you with enough room to want to look for capital gains without having to worry too much since you have protected yourself from known risks.
The Bottom Line
There’s a joke in the Kenyan FINTWEET space that says, “Kenyan investors think that diversification is owning several pieces of land in several promising areas like Nanyuki, Kamulu, Kilifi, and Juja. “
That’s not diversification. Diversification is owning several assets that are different to each other.
I hope this article has given you a 360 degrees perspective on how to think about land as an investment.