Rural land in the UK regarded as a growing assets for property investors
22-06-2012
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Commercial property values may be in decline across most of the country, but the rising price of commodities, which has led to rising profitability in the rural sector, has attracted further interest in land as a safe investment, it says.
Demand for agricultural land strengthened throughout 2011, as investors continued Their flight to safety. Both active farmers and investors proved acquisitive, due to the safe haven status of the asset class.
The restriction in the amount of land available and the weight of money moving in has led to considerable pressure on prices. Smiths Gore estimates that 127,000 acres were traded in 2011, while in the late 1980s over 300,000 acres were turned over each year. Agricultural land has continued to remain in high demand from a widening array of investors. The on going period of macro economic uncertainty and turmoil has underpinned the need for safe havens for investment, and land has been a beneficiary of this trend, explained Richard Liddiard, head of rural agency at Carter Jonas. With limited stock levels available on the open market, prices have risen throughout 2011.
Prime farmland values are forecast to continue to rise, although at a slower pace than witnessed last year, as the amount of land for sale remains relatively low,? he added. However, there is increasing evidence of a two tier market appearing, with values of poorer quality farmland forecast to witness a decline. The significant tax advantages in holding agricultural land, for investors and individuals, have further reinforced its performance compared with alternative asset classes.
The powerful tax advantages of holding land means there is little incentive to bring to the market, ensuring supply remains scarce, which will underpin current values, said Liddiard. Gerald Fitzgerald, head of valuations and investments at Smiths Gore, points out that despite a significant increase in agricultural rents of more than 20% on average, income returns remained low at 1.6% , offset by the huge rise in capital values. Capital growth was 14.2% which, as always, is the main driver behind the total return of 15.9%.
The sector remains very much a capital hold, rather than an income producing asset class, he said. He added that there are two uncertainties on the horizon. There is the reform of the Common Agricultural Policy (CAP) in 2013 which is due to be implemented January 2014, which may impact on subsidies for farmers. But he thinks it is increasingly unlikely that there will be any major adjustments to subsidies and so this is a minor risk. Secondly, there is the effect of commodity prices upon farming profitability, which have dropped back recently, and have not necessarily impacted upon returns as yet. He added that the highest commodity prices are unlikely to have been reflected in rent reviews.
Despite any concerns surrounding the inflationary pressures on the sector, rural property remains one of the best performing asset classes that IPD measures. Five year returns were 11.9% against the IPD All Property Index which recorded -0.7%, whereas equities recorded 1.2%, said Mark Weedon, head of UK alternative real estate at IPD. As a hedge against inflation it remains one of the most secure of the sectors we measure, which in the current market environment is quite exceptional. There are fewer safe capital holds in the UK, with each new economic crisis emerging. For the moment, rural property seems to be in a class of its own, he explained. Fitzgerald, of Smiths Gore, confirmed that risks are low.
Importantly, the basic economic fundamentals of the sector remain secure as supply is low and demand is high. For the farmers themselves, profitability remains high and the outlook good. Even regulatory risks to the sector remain low. The UK government has avoided any kind of rural inheritance tax reform and if the Labour government neglected to address the situation after 14 years in power, it is unlikely the coalition will, he added.
