Sale and leaseback of farmland: Is it making a comeback?

Talk to any East Anglian farm agent of a certain vintage, and it won’t be too long before they are reminiscing about the golden era of sale and leaseback (S&L).

In the 1970s and early 1980s, financial institutions such as insurance companies and pension providers in search of long-term, stable investments as a hedge against rampant inflation added hundreds of thousands of acres of farmland to their portfolios.

See also: How to unlock the best value from development land

By 1977, it was estimated that almost 25% of the agricultural land in the Eastern Counties was owned by institutions. Often, for the sake of simplicity, the farms acquired were rented back to their previous owner.

However, falling inflation and declining farming returns, not to mention the introduction of retrospective tenancy succession rules, tempered the institutions’ appetite for farmland, and by the mid-1980s a sell-off was in full swing.

S&L investors’ long-term focus

Fast-forward four decades, and where are we now?

As head of the Bidwells Rural Investment team, which works with 17 Oxbridge colleges, Roland Bull is well placed to answer.

Although there is certainly an active market for S&L deals, with no shortage of funds available for the right property, investors are more selective than they were in the 1970s, cautions Roland.

“Typically, they are looking to acquire long-term strategic development land or high-quality, agricultural investments located anywhere in England.”

This patient approach to capital can offer significant benefits for farmers looking to release some capital, he points out.

“There’s a certain class of institutional investor with incredibly long-term horizons, and because they require an occupier on the land anyway, they can be prepared to pay full vacant value for land despite immediately granting a long lease back to the seller.”

As well as not having to sell for the discount to open market value, which is usually applied to let land sales, the vendor can often secure an extremely long lease, says Roland, pointing to several sales he has brokered recently.

One involved 292ha of strategic land near Nottingham that was rented back to the seller under a 30-year farm business tenancy.

Another included 445ha of land, houses and buildings on the outskirts of Bury St Edmunds that were also leased back for 30 years.

Other benefits for the farmer can include a healthy share of the proceeds from any future development and a landlord that, while not wanting to be involved with day-to-day farming activities, is often prepared to co-invest in diversification opportunities to grow the holding’s income.

Because such deals are usually done privately, nobody else actually needs to know the farm has been sold, adds Roland.

They can also be helpful for releasing capital for succession planning without dividing the farm, he says.

An S&L renaissance?

Charlie Bryant of national agent Brown & Co reckons we could be on the cusp of a new S&L boom that goes much wider than the traditional long-term investors that Roland is dealing with.

“It hasn’t quite got the attention so far that I’ve been expecting, but I remain confident it’s going to happen, and that we will see an increasing differentiation between land ownership and occupation,” says Charlie.

Perversely, he says, on the buy side, the family farm tax furore has actually increased awareness of the inheritance tax (IHT) benefits of agricultural property relief for private investors who hadn’t been aware of it.

Yields, though, will be an important factor for such investors, and on less productive land generating lower rents, vendors may need to accept a discount on the open market value.

Despite that, higher interest rates may make an S&L deal a more attractive option than borrowing money from the bank, reckons Charlie.

“Negotiating a pre-emption to buy back the land at the end of term can also psychologically sweeten the concept of selling,” he adds.

However, unlike in the 1970s, Charlie expects transactions to be mainly centred around off-lying blocks of land rather than whole farms.

Simon Gooderham, managing partner at Cambridge-based agent Cheffins, who has dealt with a number of high-net-worth individuals looking for land, and has recently agreed a 93ha off-market S&L deal in East Anglia, concurs.

“This is all about agricultural land and buildings; these buyers don’t tend to be interested in the residential side.”

Simon also notes that S&L arrangements don’t need to involve an FBT. Sometimes a contract farming arrangement can also work, depending on the type of purchaser.

Charlie warns that farmers should use S&L for the right reasons.

“They can be a great option if you want to release capital to invest in your farm or for a new diversification opportunity, but they are not the solution for a business that is struggling to survive. You will just replace bank debt with rent.”