26 June 1998

Let land return on investments feels the pinch

By Louise Rose

BY the end of 1998 average let land yields could weaken enough to produce negative investment returns for the first time since the brief blip in 1991 preceeded by the two year period beginning in 1985.

"Similarly to the mid-80s, pressure on farm incomes now is affecting the let land market, with total returns to investors falling to 8% in 1997 compared with average annual returns of 23.3% during the past three years" says Jim Ward, FPD Savills research who jointly with the Investment Property Databank publish the FPDSavills/IPD let land index.

Also, the main contributing factor to the decline in total returns was lower capital growth totalling about 4% in 1997 unlike a 19.2% average for the previous three years.

But the small growth in capital values was supported by a continuing improvement in income growth – 6% – due to the time lag effect inherent in rent reviews, but average yields moved out from 4% to 4.2% during last year.

"Reduced purchasing power of sitting tenants – farm incomes fell by 45% in 1997 – who in 1995 and 1996 bought more than half the farms sold by the institutions, is the main factor contributing to the softening of yields," said Mr Ward.

However, some of the more traditional land owning bodies are again looking at the investment land market with demand still outweighing supply, maintains Justin Marking, FPDSavills.

"Estates let to a number of tenants offering a variety of angles for income potential are in the greatest demand," said Mr Ward, "Multi-let units often include more houses for letting and greater potential for land coming back in hand."

Also with many institutions divesting from the investment land market IPD and FPDSavills hope to extend the sample to include newer financial institutions enabling the index to be relaunched. The current sample includes 200,000 acres of let land which was deemed too small to produce an index for 1997- both on traditional and farm business tenancies a reduction of about 50,000 acres on the previous year.

*The FPD Savills/IPD let land index is the only independent benchmark of let agricultural land investment performance, identifying total return, capital growth, income return and net yield. Originally the index was based on the agricultural portfolios of the financial institutions but the sample base has widened to include land owned by some older institutions.