24 June 2011

The rural property market continues to go from strength according to the latest results from the Carter Jonas/Smiths Gore sponsored IPD Rural Property Investment Index. On the 30th anniversary of the index, it returned 9.0% in the 12 months to December 2010 compared with 8.4% recorded in 200r9.

The index measures the performance of farmland and rural property held by institutional and private investors worth just over £2.2bn and proves you don’t have to go to exotic places to get good returns.image expired

Capital growth was the main driver of total return performance delivering 7.2%, however income return, at 1.6%, declined slightly from 2009, and is now at its lowest point in the index’s thirty year history.

Gerald Fitzgerald, Smiths Gore’s head of investment and valuations, comments: “Capital growth has dried up in other markets but not in the rural property sector where we continue to see a strong upwards momentum. Rural investments have a shock absorber built into them. The flip side of the coin is that income return is down but, as savvy investors know, rural property’s benefits lie in the long term. Investors purchase land for the tax breaks which are available not on income return alone.”

Richard Liddiard, head of rural agency at Carter Jonas, agrees: “Capital values have continued to rise following the financial crisis of 2008 and while an income return of 1.6% is historically low it compares favourably with returns paid on cash deposits.”

Rural property remained steady throughout recession

The results also demonstrate a continuing net disinvestment from tenanted farmland in 2010 – of 4.3% of capital value - as owners sell land for development or when secure tenancies end. In comparison with other asset classes, commercial has outperformed the rural property market in 2010 but, unlike other UK markets, rural property did not experience negative returns during the downturn. 

Over a three, five and ten year cycle, farmland remains the top performing asset class in UK property with returns of 6.3%, 12.0% and 13.% respectively. Commercial property only managed to deliver 3.6%, 2.4% and 3.2% over the same periods. Against equities and gilts, farmland has fared comparatively well, outperforming both on a five and ten year basis but underperforming gilts in the shorter three year period.

Excess demand for property has fuelled the price and even though supply in 2011 is already much higher it will not be sufficient to peg back prices. Supply remains at an historically low level - with only 100,000 to 150,000 acres traded a year in the 2000s compared with 300,000 acres or more in the 1980s.

So have investors missed the boat? Richard Liddiard thinks not: “The last decade has been hard for farming incomes with tightening margins and volatile prices. It would appear however that we are seeing a recovery in prospects as there is a growing realisation that more realistic prices need to be paid for food if we are to feed the population safely and sustainably.”

While the overall result for rural property is positive, there are some negative undertones. Higher commodity prices have boosted profits and returns for cereal farmers but are putting pressure on livestock farmers who buy the cereals as animal feed. There are traditionally strong livestock areas that are maintaining their position through intensification but more marginal areas may look to alternative uses away from livestock farming to survive.

In conclusion Gerald Fitzgerald and Richard Liddiard concur that “Although rural property is often regarded as the poor relation it is once again holding its own against other comparable asset classes with the ability to produce a windfall value to an investor who understands the complex nature of this asset class.”

What lessons might have been learnt on the 30th anniversary of the index?

Certainly rural investments have performed over 30 years with annualised total returns of 8.2%. Of course this has not all been plain sailing and there have been periods of negative returns in the mid 80s and early 90s. Smiths Gore and Carter Jonas feel that these downturns seem to coincide with the periods of sudden change in either tax or support for farmers. The message for government is that it needs to be careful when implementing changes of not distorting the market with sudden announcements. This is especially important if we are to feed an increasing population with farming methods that are sustainable and in low carbon system.