The Model Estate Report
Despite the turbulent economic climate, agricultural land continues to be perceived as an alternative asset class to commercial and residential property and is increasingly perceived by many to be a safe haven which benefits from the provision of a regular income stream as well as capital appreciation.
The Model Estate is purely theoretical although representative of many estates within the UK. It comprises 3,200 acres and a value of £26.3 million (as at end September 2009). It comprises a combination of in-hand and let farms and also includes both commercial and residential elements and is located within the geographical triangle bounded by the M4, M40 and M5 motorways.
This report analyses the performance of each of the components of The Model Estate against equities, residential and commercial property and also with gold, fine wine and antiques over one, two and three year time periods. The report concludes that that agricultural land is capable of providing strong and indeed improving returns at a time when the performance of most asset classes are declining. In addition, it has lifestyle appeal which has encouraged many investors to consider it as a real alternative to mainstream asset classes.
Detailed Model Estate Performance
The Model Estate has proved encouragingly resilient in terms of investment performance, ranking third of all asset classes over the last year (2008 - 09). Improvement in the performance of The Model Estate was primarily derived from the let farms, which in isolation produced a total return of 4.6% in 2008-09, mainly driven by capital growth. This performance resulted in let farms out-performing antiques, equities and both commercial and residential property as well as its in-hand counterpart.
An important consideration behind the strong performance of let farms has been the increasing occurrence of the Farm Business Tenancy (FBT), in place of the Agricultural Holdings Act (AHA), which typically sets rents based on open market value for a three-year period. An improvement in commodity prices between 2007 and 2008 culminated in a significant number of tenancies witnessing rental increases, which subsequently assisted in the performance of let farms on estates.
The in-hand farms further boosted The Model Estate’s performance, producing a comparatively strong total return of 5% over the last three years. Performance was driven by capital growth and demonstrates that agricultural land values have remained resilient in relation to other property sectors, although previously they have proved susceptible to exchange rate fluctuations and the weakness of the pound.
The commercial element of The Model Estate comprises 14 properties with a cumulative size of 58,100 sq ft, and a capital value of £3.7 million. The sector produced a total return of -7.6% over the last year, which despite producing a negative figure is significantly above the -23.2% produced by its Investment Property Databank (IPD) equivalent. The Estate’s commercial portfolio benefits from a number of secure long-term tenants, which have provided a stable income stream that bolstered the total return.
The residential element of The Model Estate comprises six houses with a cumulative capital value of £1.8 million. It produced a one-year total return of 0.5%, out-performing the IPD equivalent figure of -3.5%.
Outlook
The performance of in-hand farms is forecast to improve over the next two years, with parts of the country recently witnessing increases of 5-10% in agricultural land values. Land prices, on a national level, are forecast to rise over the next five years as much as 50%, mainly driven by a decreasing supply.
The supply of agricultural land coming to the market will remain restrained in 2010 although demand is expected to remain buoyant. The General Election and possible changes to taxation are likely to temporarily depress further increases in land prices until late 2010. Demand is then set to increase further as confidence returns to the general economy and land prices are likely to witness a sharper increase in values into 2011/12.
Catherine PenmanMRICS
Head of Research
Catherine is Head of Research at Carter Jonas and is based in London and Northampton. The primary focus of her team is to produce published reports focusing on the firm’s commercial, rural and res...
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Catherine is Head of Research at Carter Jonas and is based in London and Northampton. The primary focus of her team is to produce published reports focusing on the firm’s commercial, rural and residential divisions. In addition, her time is currently directed towards the more specialist areas of the firm including the technology and energy sectors. Catherine has two young daughters and is a farmer’s daughter from the Welsh borders. Her long-term ambition is to own a small farm and continue to breed her grandfather’s flock of pedigree Suffolk sheep.
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