Let land performance %/year

23 March 2001

Return on let land pips commercials

By Andrew Shirley

AVERAGE total returns from let land for the five years to 1999 exceeded those for commercial property and UK gilts, but were unable to match UK equities.

Performance during the period averaged 12.8%, made up of capital growth of 5.9%/year and a return on income of 4.3%. Commercial property lagged behind slightly at 12.1%, but equities were well ahead with total returns of 19.8%.

However, in the face of low world commodity prices and a weak k, returns slumped in 1998 to 0.3%, with negative capital growth. Extremely low availability of tenanted farms and a continued shift from Agricultural Holdings Act tenancies to farm business tenancies at open market rents helped reverse this trend in 1999, with total returns bouncing back to 7.4%.

According to the Central Association of Agricultural Valuers, almost 80% of expiring full agricultural tenancies were re-let on FBTs and 57,000 acres were on land not previously let.

Development potential and reversion to freehold opportunities have also helped to stimulate this relatively robust investor demand for tenanted land.

The new figures are the first from Investment Property Databank using additional data from its four sponsors – Cluttons, FPDSavills, Smiths Gore and Smith-Woolley.

IPD director Vida Godson says many institutional investors pulled out of the land market in the 1970s and 80s and the survey came to be dominated by a few large estates. This prompted the firm to withdraw general publication of the index as it was felt to be unrepresentative.

The sample size, which had slipped to below 220,000 acres, is now in excess of 340,000 acres with a total value of £5.8bn.

Justin Marking, head of farm agency at FPDSavills, says the increasing rarity of tenanted land means there is still "phenomenal demand" when farms with traditional tenancies become available.

Short-term pressure

Although in the short-term foot-and-mouth may put pressure on rental values, Mr Marking says the more difficult farming becomes the more the value of let land could rise. As producers leave the industry more tenancies will be terminated allowing investors to unlock the capital value of the land – tenanted land is worth about 40% of the vacant possession value.

Let land performance %/year

See more