Farmland outperforms commercial

The IPD UK Rural Investment Property Index, which is sponsored by Smiths Gore, measures the performance of farmland and rural property worth just under £2bn held by institutional and private investors.

'Capital value growth was again the main driver of total return performance, delivering 8.2% return last year,' comments Gerald Fitzgerald, Head of Property Valuations and Investments. 'Of overarching importance to investors is the fact that farmland continues to perform well during recessions and is a useful asset to have in a portfolio.

'The capital drivers remain three-fold; farmers buying land when the opportunity arises, people purchasing for lifestyle and leisure reasons and investors purchasing for the fiscal benefits.

'Our research suggests that the farmland market will continue to perform well as pent-up demand is met with limited supply of market stock," adds Dr Jason Beedell.

Demand is increasing from all types of buyer - farmers, investors and non-farmers looking for attractive places to live. Because there are few opportunities to buy agricultural land with Agricultural Holdings Act tenancies, which is what investors are looking for due to the potential for capital value uplift when the tenancy ends, more investors are considering buying land with vacant possession and arranging for it to be farmed in order to get a foothold in the marketplace.

Although the recent election had the potential to rock sentiment in all markets, the threat to some of the new farm investment funds of changes to Inheritance Tax reliefs has receded with the advent of a Conservative-Liberal Democrat Government which supports farming.

'We expect capital values to rise in both the rural investment and vacant possession markets. Supply of land for sale remains tight and is likely to remain at low levels compared with the 1980s and 1990s. However, the reform of the Common Agricultural Policy is likely to start to affect land markets in the next 12-24 months as landowners won't sell their land in case they miss out on a windfall in the reform.'

In 2009, rural property delivered 8.2% return compared with residential property (11%), equities (30.1%), commercial property (3.5%) and bonds (-0.3%). However, over the three, five and ten year picture, rural property consistently outperformed all asset classes.

'Although rural property does not provide the high income return that other asset classes can produce in the short term, it does have long term potential for capital growth,' adds Mr Fitzgerald.