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Is it time to harvest income from agricultural land?

Is it time to harvest income from agricultural land?

UK farmland prices are expected to continue hitting record highs over the next year, albeit at a slower rate than seen over the last 18 months.

Land prices in England rose by 2.6% in the second quarter to an all-time high of £7,157 an acre, according to Knight Frank.

Although continuing their upward trajectory, the rate of increases fell back from 6.4% in the first three months, which followed on from the 12% gains seen in 2013. Price inflation in Scotland slowed from 6.8% in the first quarter to 1.6% in the second, reaching £4,329 an acre on average.

Despite concerns about greater supply coming onto the market and uncertainty around the Scottish independence vote, Knight Frank remains optimistic, expecting agricultural land prices to rise by a further 6% over the next year.

They have been on an almighty run, rising by 212% over the 10 years to the end of March. This compares to a 51% gain by the FTSE 100 over the same period, 133% for prime residential property in London and almost kept pace with gold’s 235% rise.

Of course the headline figures mask what is a complex and niche market driven by a multitude of factors, including location, soil quality and drainage. If anything, the average price per acre acts as more of a guide than a benchmark. James Prewett, head of Knight Frank’s regional farms team, highlights two major sales in the first half of the year, which saw the 1,324 acre Shakenhurst Estate on the Shropshire/Worcester border sell for £16 million, or £12,084 an acre, and a 96 acre arable plot sell for £10,500 an acre, as examples of the range within the market.

‘Where there is competition we are seeing very good prices being paid,’ Prewett said, typically when two farmers go head to head over the same desired land.

But Martin Robinson, chairman of Brooks Macdonald Funds, which manages the UK Agricultural Land fund, believes that outside of these instances of wealthy landowners bidding against each other, prices are likely to ‘mark time’ through the second half of the year.

‘There has been evidence in recent weeks and months that a lot of land is coming onto the market,’ he said. ‘Typically farmers sell at the end of the harvest and the market is likely to become a bit more cautious.’

The most high profile upcoming sale is that of the Co-op Group’s 15 farms, which with 17.808 acres, are the equivalent of over 10,000 football pitches and 12% of the 139,000 acres sold on the open market last year.

The sale has not been without controversy. Co-op has said it will not auction the farms as individual lots to community-backed scheme, favouring a bulk sale, which could raise anything from £140 million to £200 million.

In part because of its structure, Prewett does not believe that this imminent mega-deal will dampen down prices.

‘I have a number of private investors and funds actively looking for more land in the UK and this could be an interesting option for them,’ he said. ‘Despite the size of the sale, I think it is more of an opportunity for the market than a threat.’

Other investors prefer not to buy on the open market with Brooks Macdonald normally making acquisitions privately, which they then lease back to the farmer, typically for up to a five-year term with rent rises built in.

‘We tend to deal with farmers who don’t want to give up the land,’ Robinson said. ‘They want to release some cash and while they could max out the value on the open market, they would no longer have it to cultivate.’

‘Sale leasebacks also mean that no-one knows it has taken place,’ making it a much more discreet way of raising capital.

Longer-term, it is hard to find bears on the asset class, albeit many commentators, such as Savills, caution that 6% annualised over the next five years is much more realistic than the double digit gains seen in 2013.

Tom Arthey, a director at specialist farmland investment boutique Mintridge International, said long-term investors are cottoning on to the fact that agricultural land prices in the UK move independently of commodity prices. Over the coming years other factors, such as higher interest rate rates, changes to tax legislation an subsidy regimes, could actually have a greater impact on their direction.

‘That will be partially offset, however, by a continuing strong demand from farmers, landowners and investors for the limited amount of land marketed,’ he said.   

‘A similar trend is being seen in other mature markets around the world, where the rate of increase has checked slightly from the double digit annual increases experienced in some areas over the last decade. That is not to say that land prices are set to fall in the West, but perhaps there will be a more moderated and realistic rate of increase in line with the achievable returns.’

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