Rural property continued to generate impressive returns for investors in 2013, according to the results of the IPD Rural Property Index for the year ending 31 December 2013.
Over the year to end 2013 rural property returned 12.3%. This sector has performed well throughout the recession, producing a 10.9% total return during the last five years, and reinforcing its reputation as a valuable sector to have in a portfolio.
Most of the return is generated by rising values (10.7%). Although the income, which is mainly in the form of rents paid by farmers to use the land, is small (1.4% of capital value), the rents are rising due to it being a profitable period for farming.
There has been a considerable increase in activity in the investment market this year with purchasers chasing quality holdings.
Mark Weedon, Vice President, IPD, commented: “These index results show how well rural holdings have performed compared with other asset classes. This type of investment offers great diversification options against more mainstream assets.”
Richard Liddiard, Head of Farm Agency at Carter Jonas, said: “Just as we are seeing in the main farmland market for farms without sitting tenants, there is increasing price differentiation for quality, where investors are seeking large good quality arable holdings that offer the best opportunities for long-term rental and capital growth. Investors seem much more optimistic about the arable sector’s profitability, possibly reflecting the higher commodity prices and better ability to control costs. Investors therefore appear to be being driven by asset performance fundamentals and not just seeing the investment market as a cheaper form of tax vehicle.”
As a result, there has been a considerable drop in yields, especially on arable investments over the year. There has also been much more interest and activity from new private purchasers coming into the market. They have primarily been seeking arable units, on fully repairing terms to reduce risks from repair surprises. Furthermore, since these are easier to manage, they can be controlled from a great distance away and thus appeal to a much wider range of purchasers. The fall in yields has not happened for all farm types, with more marginal, lower quality land investments struggling to sell, to such an extent that there is almost a 50% difference in yields between the best and worst.
Another factor in the market is rising farm rents. For a number of years, the higher rents being agreed for new open market lettings have been dismissed as possibly a blip. However, there is a growing realisation that this rise is more long-term and that the difference in rental value between Agricultural Holdings Act and Farm Business Tenancies had become unrealistic. We are therefore starting to see rents on investment farms, with Agricultural Holdings Act tenancies, rising by significant percentages, although many landlords and tenants are phasing in this market evidence over several rent review cycles. The effect is rising investment capital values due to both expected rent reviews and agreed rents; again, this is much more of a factor for the arable units than livestock units, reflecting the sectors’ profitability.
Andrew Fallows, York-based partner responsible for estate management for the national property consultancy, commented: “The sector continues to be of interest to private and institutional investors looking for a secure asset class with the fiscal benefits that land ownership brings. We continue to see demand from those that are aware of the increased profitability within the sector and the reform of the Common Agricultural Policy.
“The underlying principles of supply and demand have meant that farmland values continue to grow and this shows little sign of abating. Investment farms are increasingly sought after and this has been borne out by sales both on and off market during the last 12 months.”