Pru deal great for duchy
Pru deal great for duchy
THE 1999 Agricultural Holdings Act let farm market was set to be the most under-supplied market for at least three decades until the Duchy of Cornwall made its astute move for the remains of the Prudential portfolio. Its timing was perfect for the Prudentials mode of thought; strong commercial property performance outlook with negative agricultural performance anticipated for 1999 and 2000.
At the time of writing this article contracts have yet to be exchanged. 28,356 acres and a price tag of £50m have been carefully mentioned in joint information releases.
I know the portfolio very well indeed from memory and how it was forged. If you take out vacant possession farmland of 1200 acres, vacant possession woodland of about 2000 acres, let cottages (non- Agricultural Holdings Act) and some development hope value, valuing on my estimated rental values the residual Agricultural Holdings Act yield is 4.5% gross (on actual rents I suspect the gross yield is 4.75%).
My initial reaction, before I did the above valuation exercise was that a premium was being paid. However, given the scale of the deal, I no longer think so. In fact I would say FPDSavills have pulled a great deal for their client. On a portfolio of this size on break-up – sales to tenants and so on – the duchy could make a fair profit although I think this will not be their objective. This I am sure is another major factor why the Prudential were receptive to the duchys approach – a sensitive and safe pair of hands with no embarrassing market turns.
The tenants also will welcome the duchy even though some of them would undoubtedly have wanted to purchase their freeholds.
By comparison there have been some other interesting and noteworthy deals of during the season (see panel).
I know of a couple of smaller institutional residual let farm portfolios that perhaps might be available in 2000. Otherwise, unless the Church Commissioners see maintaining performance of the Vicars Pension Fund in order to meet pension commitments as an issue bearing in mind negative short to medium term returns, it is difficult to see where next years market supply of Agricultural Holdings Act investment farms will come from.
It is easy to see that once rental growth occurs, yields could harden quickly given a diminishing supply bank of AHA-let farms and an ever ageing tenants profile. Gross yields could easily at this phase, with a steady economy, hit 2-3%.
However, dont get too excited as this performance could be 5-10 years away with low farming profits and reducing rents. Interim performance will be poor and 10-year performance averages steady to moderate when measured against other investments. However, where tenants give up without successors, and in the current difficult climate this may happen more often, there will be some ripe vacant possession gains for some investors to balance performance.
We have still yet to see the creation of the farm business tenancy investment market, let alone it taking off. But I do think with the industry in crisis and interest rates set to rise, those owner occupier farmers who are over-geared may be pushed towards the leaseback option either FBT or on a joint venture farming agreement. The latter is more attractive to the investor with VAT and capital tax status benefits.
Steve Humphris heads the rural property consultancy department at AKC, Devizes
Mundon Hall Estate, Malden, Essex, 1304 acres. Farmhouse, five further houses. Dairy and arable let on full repairing and insuring terms (FRI). Sold at a yield of 4.15% to the tenants family back in April. This was an interesting property with scope for reversionary performance.
High Ferry Farm, Sibsey, Boston, Lincs – a 435-acre arable unit. Four houses, a range of traditional buildings let on FRI terms. Sold at a yield of 5.25% to the tenants also during the first half of the year.
Clock and Grimston Grange Farms, Elvington, North Yorkshire. 406 acres of grade 2 land with irrigation including 11 acres of VR woods. A very good farmhouse, a secondary farmhouse, another dwelling and modern buildings, let on FRI terms. Sold to a foreign investor at a yield of 4.6%.