Back in the spring I wrote about the investment qualities of the UK agricultural sector and its viability as an alternative asset to balance portfolios. At the time there were a number of commentators who were predicting that land values had peaked and that the heat was going out of the market.
Well, seven months on and the sector still looks a pretty good bet to me, offering investors long term growth prospects, potential tax benefits and low correlation in performance compared to mainstream asset classes. An additional bonus is that rents for both arable and pasture land have also risen over the past year.
Average farmland values in England & Wales have almost quadrupled since 1995 and although latest available data presents a somewhat blurred picture over the past 12 months — the RICS opinion-based survey reports values rose over the year to end-June 2012 while the transaction based survey indicates a slight fall – the longer term outlook suggests growth is inevitable given the finite amount of agricultural land and the food demands of a growing population both in the UK and globally.
Already this year the worst drought in America for 50 years has pushed the price of commodities, such as corn, to record highs around the world. Moreover, the rapidly expanding bio-fuel industry will place increasing pressure on agricultural land use and availability.
The significant tax advantages in holding agricultural land, for investors and individuals, have reinforced its performance attributes compared with alternative asset classes.
There are two principal reliefs from Inheritance Tax (Agricultural Property Relief and Business Property Relief) which are subject to certain ownership conditions.
With regard to Capital Gains Tax, there are three potential reliefs available upon sale or transfer of the holding, again subject to certain conditions being met. These tax breaks are also appealing to people planning for retirement and, eventually, to pass assets to younger generations.
The long term performance outlook combined with the powerful tax advantages of holding land have ironically created a major obstacle to investing in the sector – namely a shortage of available land for sale.
This is amply illustrated by RICS data which reports a 61.4% reduction in the number of reported transactions between H1 2011 and H2 2012. This issue is exacerbated by the fact that around 25% of transactions take place off-market.
Farmers themselves are the main purchaser group, accounting for over two thirds of land sold which is often adjacent or close to their existing holdings. Small investors therefore have difficulty accessing deals while for large-scale investors a stumbling block is that the majority of plots which come up for sale are relatively small and available large plots are few and far between.
However, there is another route for investors interested in the sector and that is to invest in a specialist agricultural fund. This not only removes the difficulty of accessing land but additionally removes the operating cost and risk of direct ownership while offering a more liquid asset.
To date, opportunities remain limited, however they are likely to increase as fund managers seek out alternative assets in which to diversify their portfolios away from the more traditional equities and government bonds.
A recent example of an agricultural investment opportunity is the Brooks Macdonald Funds’(BMF) recently launched UK Farming plc. This is an asset-backed UK farming business which is seeking to raise an initial equity amount of up to £20 million and will operate as an unquoted public limited company targeting investment in existing arable farms.
The land will be farmed by established contractors for the company for the production of cereal crops, taking advantage of their demand for both food and, potentially, bio-fuel production. Once established, the company is expected to qualify for Business Property Relief which may enable UK tax paying investors to shelter their investment from inheritance tax.
At a time when many investors are seeking low-risk safe haven investment opportunities which additionally offer good long term growth potential, the agricultural sector at least merits investigation whether as a direct or an indirect investment.
The benchmark IPD Rural Property Investment Index shows that 5 year annualised total returns have, at 11.9%, outperformed those of both government bonds (9.0%) and equities (1.2%) over the same period. Moreover, farmland investments have historically provided an effective hedge against inflation and from an environmental perspective represent a renewable resource unlike, for example, oil and precious metals.
The scarcity of agricultural land – the amount of potentially usable agricultural land is finite and albeit reclamation is possible it is an expensive and not always successful option – should also serve to sustain values over time. We forecast that UK farmland values will increase by an 2
average of 6% per annum over the next five years. Time to dig out the wellington boots and barbour jackets?