The UK residential housing market recovery of the past months may be viewed by many commentators as a fragile affair, set to topple back into stagnation or worse for the coming year or so - but there's one area of the property market whose fortunes look markedly more robust: farmland.
According to Knight Frank's latest market forecast, UK farmland has already bounced back from the 'temporary blip' - a fall in average land values of 5.5 per cent - that afflicted it over the 12 months to summer 2009 against the backdrop of wider economic chaos. Values were up 3 per cent in the second quarter of this year, with a similar increase in the third quarter; a gain of 11 per cent is forecast for 2009 as a whole, followed by a further 9 per cent for 2010.
Andrew Shirley, head of rural property research at Knight Frank, believes the signs are that by 2015 farmland could double in value from its present average level of around £5,000per acre. At Savills, head of research Ian Bailey takes a somewhat less bullish view, predicting a 4 per cent rise this year and rises of a similar magnitude over the next few years.
One powerful influence helping to underpin values is the chronic tight supply of farmland for sale, down 25 per cent over 2009, according to Knight Frank. That's a trend reported by surveyors and agents nationwide, says the Royal Institute of Chartered Surveyors' (RICS) latest farmland market survey. As Charles Matthews of Symonds & Sampson in Sturminster Newton, Dorset, puts it: "The credit crunch has taken out some demand, but supply is so tight its hard to see where".
That is partly for the obvious reason that, as Mark Twain observed: "They're not making it [land] any more". Moreover, says Mr Shirley, banks generally look favourably on struggling farms. "There are few forced sales - farmers can always rent out their land to tenants or neighbouring farmers if necessary," he says.
Indeed, according to RICS large commercial farmers are now actively looking to increase production by taking on more local land. One big attraction is sterling's weakness, because their European Union subsidy cheques are calculated in euros (and therefore increasingly valuable in sterling terms).
At the same time, global megatrends - population growth and changing consumption patterns in emerging markets - are pushing demand for agricultural produce inexorably upwards over the long term. Land use is also being diverted to produce crops for alternative energy sources, with the UK stepping up biofuel production over coming years to meet the EU's 10 per cent road fuel target by 2020. Although prices for agricultural commodities are cyclical and highly volatile, "land prices don't fall back with commodity prices", says Mr Shirley.
Commercial vs residential
A distinction should be made between commercial farms and the 'residential' market for properties with handsome farmhouses and outbuildings, which was strongly driven by City bonuses in the pre-credit crunch period. According to the RICS survey, although commercial market values have rebounded, "farmland containing residential property has seen prices fall".
"Those in the market are targeting commercial farms rather than amenity or lifestyle properties," agrees Mr Bailey. "But the lifestyle element is still there, albeit at a lower level: new lifestyle buyers accounted for about 12 per cent of all buyers in early 2009, compared with over 30 per cent before the credit crunch."
It's only a matter of time before they return, though, for agricultural land is an attractive investment for several reasons. Not only is it a strong long-term investment in terms of both capital appreciation and income, but as Mr Bailey points out, it's one of the world's principal hedges. "Farmland values, like the price of gold, stabilised around its peak and neither has recorded the significant falls of residential and commercial property and equities over the past two years."
Better still, it comes with powerful tax breaks attached. Most importantly, after two years' ownership, no inheritance tax (IHT) is payable on agricultural land, farm buildings and farmhouses (although agricultural property relief does not extend to swanky mansions on farmland). To take advantage of IHT relief, you have to be farming the land yourself. In practice, says David Cross of Savills in Salisbury, this is typically done through an arrangement with a contractor. Another option is to rent out the land to tenant farmers, but then you will not qualify for IHT relief.
Let's get real
But how viable is it for smaller investors to tap into this long-term growth potential? Lifestyle buyers planning to contract out the farming tend to look at the 300-500 acre range, says Mr Bailey - which at £5,000 an acre amounts to £2.5m for the land alone. Economic considerations dictate that small farms of around 100 acres typically have to be rented out to neighbouring farmers or run as specialist farms, adds Mr Cross; in the latter case, "you would probably have to farm it yourself rather than through a contractor".
If you don't have that kind of money, or ambitions to get your own hands dirty, it is possible to find agricultural investment vehicles which can, incidentally, be held in a self-invested personal pension (Sipp). One interesting new option is Swiss-based Land Commodities Asset Management, whose LCUK farmland strategy provides a way for smaller investors to gain direct access to UK farms. Focusing on the distressed farm sale market (which accounted for 7 per cent of all sales in 2008), the scheme enables investors with a minimum of around £25,000 to buy into the chosen farmer's land and rent it back to him on a seven-year tenancy basis. "It's a sort of agricultural buy-to-let arrangement but with a ready-made tenant," explains Jeremy Miocevic of Land Commodities.
The scheme requires farmers to work with agricultural consultants to improve farm performance. At the end of the term they have the option to buy back the land at a discount to market value (providing prices have risen in the meantime). So investors receive a share of capital growth, plus an enhanced rental income stream (around 6-7 per cent of gross funds invested); against those returns, charges include a 7.5 per cent upfront fee, 10 per cent of rents plus a potential final performance fee.
Another offering comes from former residential fund manager Braemar. This investment is a Guernsey-listed OEIC (open-ended investment company), with the aim of producing long-term capital appreciation through a portfolio of cereal farms in east England. So far the fund holds one farm, in Suffolk, but it has around £3m of cash and a couple more properties earmarked.
One big issue for property funds is of course the illiquid nature of the assets, which can cause a huge strain in the event of a run on the fund. Against this, Braemar's fund stipulates that investors can withdraw no more than 10 per cent of their money in any month. Despite this, director Marc Duschenes says: "Interest from private investors has exploded in the past couple of months".
