‘Let farmland providing good returns’

Agricultural land continues to deliver solid returns for investors despite the recent economic turmoil, according to latest figures from Carter Jonas.



As a result, demand is expected to remain buoyant, outstripping supply and driving up land values sharply over the next few years.


The firm gleaned the results from its theoretical, 3200-acre Model Estate, sited in the south Midlands.


It consists of a mix of in-hand and let farms, as well as residential and commercial interests.


Overall, that combination produced a modest total return of 0.5% over the year to 30 September, 2009, says head of research Catherine Penman.


“The Model Estate has proved encouragingly resilient in terms of investment performance. Although returns dipped to -2.7% when measured over the past two years, performance has strengthened to 2.4% a year since September 2006.”


Let land was the star performer. Returns hit 4.6% in 2008/09 and a healthy 7.2% a year for the past three years.


“We were quite surprised, given general economic climate,” says Mrs Penman. “It’s a very healthy result compared with other asset classes.”


She believes the continuing conversion from Agricultural Holdings Act to Farm Business Tenancy agreements is a key driver, as well as capital appreciation.


“Rents are typically based on open-market values for a three-year period. We saw a significant increase in a number of tenancies, based on much better commodity prices between 2007 and 2008.” The average for all land of more than 1920 acres, some fully equipped, some bare, was £79/acre at the end of September 2009, compared with £66/acre at the start of 2006.


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In-hand farms struggled to deliver much two years ago, when land prices dipped, but showed some improvement last year as values edged up in the spring. Total value was just over £7.2m in September (£5784/acre), up almost £3m, or £2200/acre, over three years.


Overall, these in-hand farms chalked up a 5% return since 2006. “Land has proved to be a good investment, offering superior returns to the banks and several other asset classes,” says Mrs Penman.


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“It can also be a lifestyle investment – you can manage it, live it and enjoy it, rather than just locking it away in a vault. So to many people it is more than just a straightforward investment.”


The other main components of the estate portfolio, commercial and residential properties, suffered much more from the economic downturn.


Based on 14 properties totalling just over 58,000 sq ft, the commercial area produced a negative return of -7.6% on £3.7m capital value, rounding off three years of heavy losses.


Only the stability provided by the estate’s several long-term tenants prevented the figure from sinking further towards the equivalent -23.2% figure reported by the Investment Property Databank.


The same was true for residential values, which produced a one-year return of 0.5% on the £1.8m value of the six rented houses.


The other, tiny element of the estate, a syndicate shoot and telecomms mast, collectively produced a 4% total return, due entirely to capital appreciation.


As well as examining the comparative performance of actual estate assets, Carter Jonas has also judged them against a range of other asset types that a typical existing or prospective estate owner might consider.


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“Gold has done very well over the past 10 years,” says Mrs Penman. “And it produced the highest return by a significant margin last year, at 15.7%. Due to the sharp economic downturn, investors have sought out asset classes that would preserve their capital – gold has been strong and relatively stable.”


Equities recorded a good year, slightly over 6%, to take second place in the return stakes. “But this strong performance disguises a significant variation in returns, and taken, over three years, equities rank sixth out of the seven types of asset.”


The Model Estate fared comparatively well, says Mrs Penman. “This analysis firmly establishes that, despite market uncertainty, agricultural land is capable of providing strong and indeed improving returns when the performance of most asset classes are declining.”


But there is a caveat. “Let farms have proved to be the jewel in the crown over the past three years. But the sub-sector is likely to remain volatile – as commodity prices go down, rents will eventually follow.”


Mrs Penman believes in-hand farm returns look solid. “We have thought long and hard about this, but there is a decreasing supply of land. And demand is still rising, with overseas investors adding to a strong domestic market.


“Everyone is looking to the future – food security and how we are going to feed the world. It all points to a strong upward trend. We predict land prices, on a national level, will rise by as much as 50% over the next five years.”