Industry experts discuss the future for investment in rural land
Rural land has seen a dramatic increase in investment interest over the last few years, but how has the sector really performed, and does it have a place in the modern investment portfolio?
Leading industry experts gathered at Portcullis house last week to discuss the issue at a Cambridge University Land Society Seminar, co-sponsored by Knights Solicitors and Bidwells and Chaired by James Pavey, Partner of Knights Solicitors.
Ian Cullen, co-founding partner of the IPD began by presenting data showing how the UK Rural Property Index had outstripped all other major asset classes in 2007. Mr Cullen told the group that whilst the total return index average was 8.5%, the figures fluctuated significantly over the last 25 years. The actual income return was lower but far more stable, settling at just over 2%.
Carl Atkin, Partner and Head of Research at Bidwells Agribusiness commented "land is worth what people will pay for it – either for what it will "earn" for them (in terms of agricultural production, amenity and recreation value, development potential and fiscal benefits) or for what it "means" to them (in terms of lifestyle, leisure time and personal preferences). He noted that each holding was unique and that average quoted land values could be hugely distorting: it was not unusual for good land to be undervalued and poor land to be overvalued in different markets.
Carl went on to note that the strength of the correlation between agricultural land prices and soft commodity prices varied in different regions of the world. "There is a very strong correlation between the price of land and the major agricultural commodities in many of the mid-Western US states" he noted "with the price of soybeans and land in Illinois showing an almost perfect correlation. The same holds of Corn prices and land prices in Iowa and Wheat prices and land prices in Kansas – after all you're probably not buying agricultural real estate in Kansas for its amenity value! In contrast, in the UK the situation was very different. Ever since the early 1960s there has been a divergence between the 'agricultural earning potential' of the land and its 'market value' – which reflects the importance of the fiscal and amenity value drivers in the UK already discussed."
He went on to note that rural land has often been characterised by a low and volatile income return, and that to maximise the income return in most countries often meant some exposure to operational farming. "In the United Kingdom the Farm Business Tenancy allows most of the benefit of upsides in commodity prices to pass back to the landowner – this is certainly not true in other countries. Some countries have such archaic tenancy legislation from the landowners perspective they make the English AHA look positively flexible!" concluded Mr Atkin. He went on to note that there was however, a strong argument for capital growth in many agricultural land markets – and for convergence where markets are imperfect – i.e. between Eastern and Western Europe.
Carl noted the challenges associated with rural land – in some countries land reform has been muddled, especially in many former centrally planned economies. Markets are imperfect and often the market depth is very small – and in some countries no good data on market size or spread exists. There can be challenges establishing title (especially in the Former Soviet Union) and deployment can be complex due to tenancy legislation, land being locked in corporate entities or foreign ownership restrictions. Land is also characterised by being management intensive compared to commercial real estate. Globally there is an enormous spread of values - from €500/ha in Russia to €35,000/ha in Denmark - with the USA circa €4,500/ha and UK circa €15,000/ha.
Maximising income also need to consider not only the agricultural profitability but also residential property, forestry, sporting, minerals and environmental income, as well as exploiting planning and development opportunities, noted Mr Atkin. In the UK, this meant making sure that the appropriate representations were made to the minerals plan and on Local Development Frameworks (LDFs).
Jim Paice, Shadow Minister for Agriculture and Rural Affairs, outlined the main issues in the policy and regulatory environment affecting the ownership of Rural Land. He noted the strategic importance of agricultural production and the likely positive impact of that on owning and occupying rural land.
Noel Manns, principal of Europa Capital, outlined his views on rural landownership as the trustee of a major landowning charity in the UK. He confirmed that rural land had performed well as part of their portfolio and they will remain rural landowners. However he did comment that that some commercial investments were very cheap at the moment and could make a good buy.
The panel concluded that whilst rural land may not provide the high income returns that other investments might in the short term, it does form a useful part of a balanced investment portfolio as a long term, reliable investment with capital growth potential. It also shows a low or negative correlation with equities and bonds and other real estate classes and is a long term inflation hedge which has proved less volatile than equities.
The key drivers for investment in rural land have not changed, but Mr Atkin concluded by confirming he thought the outlook for soft commodities was strong. "Markets have fallen on the back of a bumper harvest and global financial deleveraging but it is clear that with a smaller 2009 global harvest, a divergence between hard and soft commodity prices and strong medium term fundamentals the outlook remains very positive for soft commodities underpinning commercial farmland values."
View the follow-up Investment in Rural Land Debate document
