Returns from tenanted farmland have slumped, but they are still outperforming other investments over the longer term.

According to the latest report from property analyst IPD, the total return from let land, including sales during 2005, was 9.4% compared with 18.5% the year before.

But over a five-year period, the figure rises to 16.4%, significantly better than commercial and residential property and well ahead of equities.

Hugh Coghill, head of rural property at Savills – one of the sponsors of the IPD let land index, which covers almost 600,000 acres – said the main reason returns had fallen was slower growth of capital values.

At 7% (15.6% in 2004), this was the lowest since 1999 and was probably due to a slowdown in the increase in the residential value of estates, he said.

Income return, the amount of cash generated by actual rents and other income relative to capital values, also fell to 2.3%, the lowest since the index started in 1981.

Mr Coghill said falling yields were a natural consequence of rising capital values, but were also indicative of the state of agriculture.

“There hasn’t been a lot of confidence in farming and I think landlords have been sensitive as to how arbitrators would treat a request for a rent increase.”

But Mr Coghill reckoned the returns were still respectable and would not signal a large-scale sell off of their holdings by landlords.

“I think people will look back over the past few years and think that capital growth has been exceptional.”

There was also the potential for Agricultural Holdings Act rents – 85% of the land in the index is let under these traditional tenancies – to increase.

“Rents have not really moved since 1995.

We’ve been in the doldrums for 10 years, but I think we’re starting to come out of them now.”

Desmond Hampton at Cluttons, another index sponsor, was less bullish about holding on to let land as an investment.

“Yields are getting lower and lower and that can’t go on for ever.”

Mr Hampton said he was advising the firm’s clients who asked for advice on their portfolios to sell any tenanted land unless it had some sort of development potential, even though the value of the property would be much greater once vacant possession was realised at the end of a tenancy.

“In my experience it’s uncanny how often a successor comes out of the woodwork just when you think you are about to get possession.”

andrew.shirley@rbi.co.uk