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Bet on land

Prime location investment has been spectacularly profitable recently, yet even more spectacular have been the returns made on farmland

22 June 2015

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Although 'super-prime' central London properties regularly garner the lion's share of press commentary for rocketing returns and price rises, there is another market which has seen huge increases over the last decade - agricultural land.

Savills recently estimated that good agricultural land has increased 270 per cent in value over the last decade, compared with a 135 per cent rise for London houses during that time.
It estimates that farmland has also beaten the FTSE All-Share index, and even gold.

High profile buyers in the UK have included the billionaire inventor, Sir James Dyson, as well as the Wellcome Trust, which last year bought 40,000 acres from the Co-Operative Group, marking the largest farm sale for over two decades.

Many see farmland in a similar vein
to gold; a safe haven which has tended
to be counter-cyclical to the rest of
the economy.

Limited supply

Another important factor behind this meteoric rise has been the limited supply of high quality land, with estimates suggesting that in the year 2000, 300,000 acres were on the open market, which dropped to less than 150,000 in 2013.

The UK agricultural market is evolving, making it even more necessary for farm owners to increase the size of their estates. At Brachers, we estimate that one family may need at least 1,000 acres to ensure an arable farm remains competitive.

Choices for farm owners looking to expand are limited, as many will look to buy available land off adjoining properties. This naturally puts a premium on the land, with neighbouring landowners often able to command a much higher price than the land is worth.

International demand

Globally, a broader swathe of investors such as private equity houses, investment banks, pension funds, hedge funds and, oligarchs, are all allocating an increasing share of their portfolios to farm land.

Sub-Saharan Africa has been a very popular recent investment destination, benefitting from a low entry point as well as the opportunity to develop a large scale operation, from a very early stage.

Global food prices have rocketed recently and increasing wealth in frontier markets has meant changes towards more protein-based diets, ensuring ample opportunities for arable and cattle farms.

Although farms in Sub-Saharan Africa will involve more risk, including potential political instability, poor access to infrastructure or irrigation, as well as issues surrounding challenges to ownership, the yields can be very attractive, with investors reaping returns of 15 or 20 per cent in some cases.

A European trend

Within Europe, only Denmark and Spain have seen average farmland prices drop over the last year or two, with upticks across the rest of the EU. Over the last decade, prices have grown across Britain, France, Italy and Germany.

The Netherlands is the home of record EU farmland prices, which average €49,575 per hectare, compared to €18,962 in Britain, €19,400 in Italy and €22,267 in parts of eastern Germany and €5,420 in France.

As you might expect, growth within the UK varies significantly between different types of farmland and regions. Larger arable farms have seen strong growth, while smaller livestock farms (where buildings, both part of the working farm and residential, may well account for the majority of the holding's value) have seen far weaker growth.

Research by Smiths Gore suggests that there is a significant variation between the marketing of farmland within the UK. The south-west and east of England are the most active regions, with 19,300 acres and 18,000 acres marketed respectively this year, compared to 4,500 acres in the north-east and 5,800 in the north-west.

Private investors and high-net-worth individuals have also been buying up UK farmland, with tax benefits seen as a contributing factor. These include generous tax breaks on inheritance
and capital gains tax. Land is exempt from inheritance tax, provided it is actively farmed.

While capital growth for UK farms has been very positive, it must be remembered that average yields can be low (between 1 and 2 per cent). This may also discourage some potential investors.

Although we do not expect the dramatic rises in farmland values to continue over the next decade, strong demand and limited supply will mean that prices are likely to remain stable, at the very least, for the foreseeable future. 

Christopher Eriksson-Lee is a partner at Brachers