Virtual Farm: Capital growth boosts investment returns

Performance review should be part of any business strategy. Ian Bailey and Alex Lawson of Savills consider the investment performance of the Savills/Farmers Weekly model arable farm since its launch in 2010.

The opening value of the farm in September 2010 was £11.6m, with residential properties representing £1.65m or 14% of this value (see graph 1). At the close of the 2012 harvest year last September, the total value of the farm had increased by 30% to almost £15m.

The uplift in value was entirely in the land and buildings. Pressure on residential values and the increase in arable land values over the past few years means the four houses on the farm now represent 11% of the total value.

Demand for good-quality arable farms is strong and we believe the total value of the Virtual Farm is likely to continue to rise, albeit with annual growth more muted at around 6-7% a year in contrast to the 12-15% recorded between 2010 and 2012.

So, by 2017 the Virtual Farm could be worth around £20m. We anticipate residential values will pick up, with growth of 2% in 2014, increasing to around 5% in 2017 and slowing the fall in the value of the residential proportion of the whole (see graph 1).

Virtual Farm graph1


The core borrowing on a long-term AMC loan had outstanding capital of just £200,000 at September 2012. The long-term loan represents less than 2% of the total property value.

In addition, the business has reduced its overdraft from £336,000 in September 2010 to £60,000 at September 2012, thanks mainly to a good harvest and prices in 2011. By the end of March 2013, there was a credit balance of £50,000 in the bank.

What is the virtual farm?

  • Hypothetical farm – a typical 2,050-acre top 25% combinable cropping family partnership
  • An efficient, well-run business but facing depreciation and investment issues
  • On Grade 3 heavy arable land in central England
  • 1,550 acres owned, remainder located five miles from the home farm and farmed on a Farm Business Tenancy
  • Home farm includes 40 acres of woods and 10 acres of other land, tracks and buildings
  • Modern farm buildings include a grain store with capacity for 75% of the crop
  • Range of traditional buildings may be suited to alternative use
  • Cultivations and machinery centred on non-inversion tillage system
  • Residential property includes a farmhouse and good detached house occupied by farm manager
  • There is also a pair of farm cottages, one of which houses the tractor driver while the other is let on an Assured Shorthold Tenancy (AST) for £7,250/year
  • Created by Savills Agribusiness and Farmers Weekly to identify challenges for similar businesses and design strategies to cope with them

Investment Performance

There is a lot of interest in investing in farmland, especially globally, and although return on capital is not a top objective for many farmers it is sometimes useful to stand back and look at how your business is performing against other assets in this context.

Holding land and farming actively has tax advantages, which contribute to the investment performance of farmland.

We have calculated percentage net income yield for the Virtual Farm by dividing the profit by the average amount of capital employed in the business, including the land value. This, plus any annual capital growth, gives the total return.

As with residential property, the main driver of the investment performance of farms is capital growth. Income yields from the farming business for the 2011 and 2012 harvest years were around 2% on the capital employed, but once capital growth is taken into account total returns come to 13.7% and 16.9% respectively.

The performance of the Virtual Farm is compared against alternative investment assets in graph 2. This shows total return from the farm outperformed the main alternative assets in both years, with the exception of gilts in 2011.

Virtual Farm graph 2

The land market remains diverse, with the strongest growth recorded for the best commercial arable farms. In contrast, smaller farms, predominantly livestock, which have a significant residential weighting, are recording weaker or zero growth in values and therefore opportunities may be more restricted on these farms. However, this shouldn’t preclude them from this type of analysis in a business appraisal.

Future options

The above analysis clearly shows the Virtual Farm business is in a strong position. Investment plans will depend on the objectives and succession plans of the family partnership, but they are well placed to consider directions that might include:

Increased borrowing at current competitive rates – this could fund:

  • Farm expansion, renting or buying more land if available
  • Diversification – might include converting traditional buildings into commercial workspace
  • Investing in commercial or residential property off farm – it’s currently a buyer’s market and while demand in the letting market must be carefully researched, these markets are worth consideration so that you are in the right position when the wider economic situation improves.

Selling and cashing in on the rise in land values over the past 10 years to fund:

  • Retirement or an alternative lifestyle
  • Investment in alternative assets that may have the potential for greater capital growth on recovery
  • Sale and leaseback of the farm to release funds for retirement or alternative investment.
  • It is important to stress that all plans should be carefully considered and backed by detailed budgets and market research, as well as a thorough investigation of the tax impact of any proposal.

Ian Bailey is head of rural research at Savills; Alex Lawson is director of farm agency

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