Rural Property Index Overview
Rural property Income return was up marginally over the 12 months, in part as a result of new tenancy arrangements, active management was the primary driver of returns, with alternative uses, and the promotion of strategic land counteracting wider market capital value declines.
The sector faces challenges on a number of fronts, with subsidies, in their current form, being replaced with the new Environmental Land Management Scheme; amendments to succession rules which could delay reversions and associated capital uplifts; and income from telecommunications installations set to reduce for many as leases come up for renewal following the introduction of the Electronic Communications Code 2017.
But despite the challenges ahead, rural investors can look to emerging opportunities to enhance income. As all new developments are legally required to show a biodiversity net gain, the ‘offsetting’ of gains will present opportunities for land that would not otherwise be suitable for development.
Development and non-agricultural uses, however, will remain a key source of revenue in a sector characterised by low income returns. The Planning for the Future white paper, launched in August 2020, signalled the commencement of some of the largest planning overhauls to be witnessed for a generation, including greater engagement with local communities, increasing importance of green spaces, plans to build homes quicker, more emphasis being put in Local Plan, and an increased focus on achieving net zero carbon emissions throughout the development process. 2020 also saw an amendment to Change of Use and Permitted Development rights.
Rental returns
Bidwells analysis of our managed rural investment portfolios over the past two years records an average income return of 0.71% in 2018, rising to 0.77% in 2019, and slightly down to 0.73% in 2020. Over the past decade, our research shows rural portfolios have consistently produced a strong return when compared with other property classes, although this is predominantly driven by capital growth and active management rather than rental growth.
Across rural investment portfolios managed by Bidwells, average capital growth in 2018 was 5.35%, falling to 3.17% in 2019 and 2.72% in 2020. The softening of agricultural land values over this period accounts in part for this falloff.
Land Values
Our analysis finds that, having reached a peak over just over £10,000 per acre in 2014/15, land values slipped over the last five years or so prior to the pandemic. However, during 2020 average values rose by approximately 3% to just over £8,000 per acre.
We have seen a gradual contraction of the vacant possession premium in recent years as a result of the stagnation of capital values against a continued rise in subject to tenancy values. The discount from vacant possession value has fallen from 45% in 2010 to 37% in 2020.
Bidwells research identifies that, whilst there are a great number of factors affecting land values, there is a noticeable trend between the introduction of an areabased subsidy in 2005 and the subsequent rapid growth in agricultural land values.
Over the period from 2005 to 2018, the average price of agricultural land in the UK rose by 128% in real terms, whilst net farm income reduced by 12% in real terms. The growth continued at pace until 2016 when the UK voted to leave the EU and the future of Basic Payment Scheme was jeopardised.
Rural property delivered a total return of 3.44% in 2020, down from 3.9% in 2019 and 6.06% in 2018.
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