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CHESTERTON HUMBERTS RESEARCH BRIEF – SPRING 2012
The Investment Case for UK Agricultural Land
RETURN TO THE COUNTRY?
CHESTERTON HUMBERTS RESEARCH BRIEF2
• AveragefarmlandvaluesinEngland&Walesreachedrecordlevelsin2011andChestertonHumbertsforecaststhattheywillincreasebyanaverageof6%perannumoverthenextfiveyears
• Growthinfarmlandvalueshasoutpacedequitiessincetheearlynoughtiesandresidentialpropertysince2007
• Overa5and10yearperiod,ruralpropertytotalreturnsoutperformedequitiesby690bpsand960bpsrespectively
• UKagriculturalincomegrowthoverthepastdecadewasoverthreetimeshigherthantheEU27average
Thecaseforinvestingintheagriculturalsectorisbecomingincreasinglycompelling.Agriculturallandisatangibleassetwhichoffersportfoliodiversificationopportunities,andthereislowcorrelationbetweenyieldsforfarmlandandthoseforothermainstreamassets.Thishasbeenofparticularrelevanceduringthepost-globalrecessionyearswhenagriculturallandhasperformedwellincontrasttotheuncertaintysurroundingthemoreestablishedassetclasses.Moreover,farmlandinvestmentshavehistoricallyprovidedaneffectivehedgeagainstinflationandrepresentarenewableresourceunlike,forexample,oilandpreciousmetals.
TheUKadditionallyofferstaxplanningincentivesassociatedspecificallywithagriculturallandwhichfurtherenhancetheattractivenessofthesector.Theserelateprincipallytoincometax,capitalgainstaxandinheritancetax.Furthermore,theUKpropertysystemistransparentandofferscleartitleto
owners,withinastablepoliticalandeconomicenvironment.
Investorinterestinagriculturallandhasincreasedsincetheglobalrecessionwithwealthyindividuals(forinvestmentandlifestylepurposes),privateequityfunds,institutionsandspecialistagri-fundsallrepresentedalthoughthemajorityoffarmlandtransactionsareaccountedforbyfarmerslookingtoexpandoperationsand,inthecurrentenvironment,takeadvantageofhighsoftcommodityprices.ForeignpurchasershavebenefittedfromtherelativeweaknessofSterlingoverthepastfewyears.
Accessingthemarketcanbedifficult,however,asthereiscurrentlyashortageofavailablelandandaround25%ofdealswhichtakeplacearetransactedoff-market.Transactionvolumein2011wassimilartothatrecordedin2010andwasalittleunder5%higherthanthe10yearannualaverage.
return to the country? The Investment Case for UK Agricultural Land
Thecombinationofagrowingpopulation,risingsoftcommoditypricesandthedrivetofindsustainablealternativefuelsourcesisplacinggrowingpressureonthesupplyofagriculturallandwhichinturnisattractingincreasinginvestorinterest.Thisreportexaminestheperformanceoftheagriculturalsectorovertimeandassessesitslongertermprospects.
AGRICULTURAL LAND AS AN INVESTMENT ASSET CLASS
INTRODUCTION
Agriculturallandisatangibleassetwhichoffersportfoliodiversificationopportunities,andthereislowcorrelationbetweenyieldsforfarmlandandthoseforothermainstreamassets.
CHESTERTON HUMBERTS RESEARCH BRIEF 3
Institutions
Private Equity Funds
Agri-Funds
Private individuals/Family Offices
Farmers62%
22%
8%
5%3%
Source:RICS&ChestertonHumbertsResearch
Figure1:UKfarmlandpurchasersbytype:2008-11
0
100
200
300
400
500
600
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source:Defra/RICS
Figure2:reportedfarmlandtransactions
AccordingtotheIPDRuralPropertyInvestmentIndex,thesectorintheUKhasdeliveredsuperiortotalreturnscomparedtocommercialproperty,residentialpropertyand
equitiesoverathree,fiveand10yearperiodandhasoutperformedgiltsoverafiveand10yearperiod.
KEY PERFORMANCE INDICATORS
CHESTERTON HUMBERTS RESEARCH BRIEF4
-4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00%12.00%
14.00%16.00%
CommercialProperty
10 year5 year3 year1 year
ResidentialProperty
RuralProperty
Gilts
Equities
Source:IPD
Figure3:UKnominaltotalreturns,ungeared,asatend-December2010
AveragefarmlandvaluesinEngland&Waleshavealmostquadrupledsince1995andtheRICSRuralLandMarketSurveyreportedthattheyreachedarecordhighin2011of£20,722perhectare.Yearonyeargrowthof
averagefarmlandvalueshasoutpacedthatofequitiessincetheearlynoughties,residentialpropertysince2007andhasonlybeenovertakenbygoldinthelasttwoyears.
1995
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H2
5,000
0
10,000
15,000
20,000
25,000
£ per hectare
Source:Defra/RICS
Figure4:AveragetransactedfarmlandpricesinEngland&Wales
Yearonyeargrowthofaveragefarmlandvalueshasoutpacedthatofequitiessincetheearlynoughties.
CHESTERTON HUMBERTS RESEARCH BRIEF 5
0
50
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19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
2011
England & Wales Residential
Farmland Values
10 Year Gilts
FTSE All-Share
Gold
Index: 1995=100
Source:LandRegistry,BoE,RICS
Figure5:GrowthinEngland&Walesfarmlandvaluesvsgrowthofselectedassets
Totalrealincomefromfarming(TIFF)hasbeenvolatileoverthepastfourdecadesbuttrendedupwardsduringthenoughtiesduringwhichperioditmorethandoubledinreal
terms.Overthepastdecadelivestockoutputhascontributedonaveragearound54%oftotalgrossfarmoutputcomparedtocropoutputwhichhasaveragedaround34.5%.
1973
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£million
Source:Defra
Figure6:TotalrealincomefromUKfarming(TIFF)
UKagriculturalincomegrowthoverthepastdecadecomparesfavourablywiththerestofEurope.AccordingtoECstatistics,estimated2011incomefromUKagriculturalactivitywasjustunder83%higherthanin
2000,whereasthecorrespondingfigurefortheEU27countrieswas24.5%andfortheEurozonecountriesincomein2011was4.2%lowerthanin2000.
CHESTERTON HUMBERTS RESEARCH BRIEF6
Index: 1995=100
2000 20112000 2002 2003 2004 2005 2006 2007 2008 2009 2010
155
145
135
125
115
105
95
85
75
EU (27 countries) EU area (16 countries) United Kingdom
Source:Eurostat
Figure7:Incomefromagriculturalactivity:UKvsEU27vsEurozone
Note:2011dataareestimates
Thetypeoftenancyagreementcansignificantlyaffectrentalincome.AveragerentsforfarmlandletundertheAgriculturalTenanciesAct1995arecurrentlyover1.75timeshigherthanthoseregulatedbytheAgriculturalHoldingsAct1986andhaverisenby36%forarablelandandby35%forpasturelandbetweenH12009andH22011,whilethecorrespondingincreasesforlandletundertheAgriculturalHoldingsAct1986aremuchlowerat12%and9%respectively.Furthermore,thegapbetweenrentsforfarmlandletundertheAgriculturalTenanciesAct1995comparedtotheAgriculturalHoldingsAct1986haswidenedbymorethan20%sinceH12009.
EfficiencyintheUKagriculturalsectorhasimprovedconsiderablyoverthepastfourdecadesthankstoadvancesintechnology,thegrowthoflarge-scalecapitalintensivefarmsrunbycorporateownersandtheimpactoffarmingpolicychanges,notablytheCommonAgriculturalPolicy(CAP).AccordingtodatafromDefra,totalfactorproductivityforthesectorincreasedby51%between1973and2010.
OUTLOOK
Anumberoffactorspointtoapositivelongtermoutlookfortheagriculturalsector.Increasingaffluenceandchangingpatternsofconsumptionarealreadyleadingtorisingpercapitademandforfoodandtheworld’spopulationcouldreach9.3billion(a35%increase)by2050accordingtoUNmedium
scenarioforecasts.Thiswillplaceincreasingimportanceonagriculturalresourcesandannualglobalconsumptionofwheatandcerealshasalreadyoutstrippedproductioninsixoutofthepast11yearswiththeshortfallhavingtobemadeupfromexistingstocks.
Althoughdisplayingafairdegreeofvolatilityoverthepastthreedecades,worldfoodpriceshavenonethelesstrendedupwardsoverthisperiodandin2011reachedrecordlevels.ThevalueofUKfoodexportshasalsorisenstronglyduringthenoughties(+83%),helpedbytherelativedeclineofSterlingagainstthemajorinternationalcurrenciessince2007.Itishighlylikelythatfoodpriceswillcontinuetotrendupwardsoverthelongertermgiventhemountingpressureonconsumptionfromtheexpandingglobalpopulation.
Technologyadvancesshouldresultinimprovedcropyieldstherebymakingfarmingmoreefficientandprofitableaswellasenablingthefurtherdevelopmentofusefulnon-foodcrops,rangingfromplasticstopharmaceuticalsandbio-fuels.
Theincreasingimportanceofthebio-fuelssectorcanbeseeninitsgrowingshareofUKcropoutputwhichtripledduringthenoughtiesfromaround3%in2000to9.1%in2010.ThereareseveralGovernmentschemesdesignedtopromotegreateruseofrenewableenergysourcesandthe2009RenewableEnergyDirectivehassetatargetofdelivering15%(comparedto3%in2009)oftheUK’senergyconsumptionfromrenewablesourcesby2020.
Technologyadvancesshouldresultinimprovedcropyieldstherebymakingfarmingmoreefficientandprofitableaswellasenablingthefurtherdevelopmentofusefulnon-foodcrops.
CHESTERTON HUMBERTS RESEARCH BRIEF 7
Onthesupplyside,theamountofpotentiallyusableagriculturallandisfiniteandalbeitreclamationispossibleitisanexpensiveandnotalwayssuccessfuloption.Inthefaceofthelikelygrowingsupply/demandimbalance,farmoutputpricesarelikelytoriseasarelandvalues.WeforecastthatUKfarmlandvalueswillincreasebyanaverageof6%perannumoverthenextfiveyears.
Thereareissueswhichwillneedaddressing.Landdegradationasaresultofchemical,physicalorbiologicalchangespresentsarisktothefuturecapacitytoproduce.However,prudentlandmanagementcombinedwiththeefficientuseoftechnologyshouldlargelycountertheseeffects.Forexample,accordingtotheEuropeanCommission,thelong-termapplicationofcompostwillestablishhighernitrogenlevelsinsoilswhichshouldenablecomposttoreplacesyntheticfertilisers.
Thepotentialrisksofclimatechangearewell-documented,notablywithregardtowateravailability,pestsanddiseases.
However,climatechangecanalsobringopportunitiesincludinglongergrowingseasons,reducedfrostdamageinthewinteraswellascreatingpotentialnewlocationsforcrops.ArecentDefrareportconcludedthatwarmertemperaturesandhigherconcentrationsofCO2intheatmosphereshouldleadtohigheryieldsofmanycropscurrentlygrownintheUK.
Governmentpolicy,bothatUKandinternationallevel,willalsobecrucialindeterminingthefuturewell-beingofthesector.TheEU’sCommonAgriculturalPolicy(CAP)isthemostimportantframeworkunderwhichUKfarmerscurrentlyoperateandoveronethirdofitsbudgetisspentondirectpaymentstofarmers.LastOctobertheEuropeanCommissionpublisheditsproposalsforareformofCAPeffectivefrom2014-2020butthepackagehasalreadybeencriticisedbyUKgovernment.Weawaittheoutcomeoftheconsultationprocesswithinterest.
US D
ollars per metric tonne
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Wheat Maize Barley
19801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011
Source: IMF
Figure8:WorldCerealPrices1980-2011
Thecontentsofthisreportareintendedforthepurposeofgeneralinformationandshouldnotberelieduponasthebasisfordecisiontakingonthepartofthereader.Althougheveryefforthasbeenmadetoensuretheaccuracyoftheinformationcontainedwithinthisreportatthetimeofwriting,noliabilityisacceptedbyChestertonGlobalforanylossordamageresultingfromitsuse.ReproductionofthisreportinwholeorinpartisnotpermittedwithoutthepriorwrittenapprovalofChestertonGlobal.March2012.
CONTACT
David HebditchHeadofRuralDivisionT:+44(0)1823348290E:[email protected]
Andrew PearceDirectorRuralLincolnT:+44(0)1522516830E:[email protected]
Neil GladwinDirectorRuralTauntonT:+44(0)1823348294E:[email protected]
David PardoeDirectorRuralSalisburyT:+44(0)1722342393E:[email protected]
Christopher JerramDirectorRuralChippenhamT:+44(0)1249444555E:[email protected]
Harry BainesDirectorRuralStamfordT:+44(0)1780758093E:[email protected]
Craig HortonDirectorRuralMarlboroughT:+44(0)1672519111E:[email protected]
Richard SavilleDirectorRuralPetersfieldT:+44(0)1730862043E:[email protected]
Nicholas BarnesHeadofResearchT:+44(0)2030408406E:[email protected]
ChestertonHumbertsisamulti-disciplinarypropertybusinesscoveringResidentialSales&Lettings,Estate/PropertyManagement,International,RuralandCommercialwith70officesworldwide.
ChestertonHumberts’RuralDivisionpridesitselfwiththeexpertisethatitsknowledgeableprofessionalRuralTeamshavegainedovermanyyearsexperienceintheruralpropertysector.ThecombinedspecialismsoftheTeamsrangefrominvolvementwithfarmers,landownersandestateownerstoensuingadviceandworkinestatemanagement,salesandacquisitions,professionalservices(includingvaluation),planningandequestrian.
ShouldyouhaveanyquestionsregardingthisreportorwishforanyotherinformationconcerningtheUKruralpropertymarketpleasedonothesitatetocontactanyofthenameslistedbelow.
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