Rural property continues upward momentum and actively managed funds produce 20%+ returns
On the 30th year anniversary of the Carter Jonas and Smiths Gore sponsored IPD Rural Property Index the results, released this week, demonstrate that the rural property market continues to go from strength to strength.
From the period January – December 2010 the index returned 9.0%, compared with 8.4% recorded in 2009.
The index measures the performance of farmland and rural property held by institutional and private investors worth just over £2.2bn and proves you don’t have to go to exotic places to get good returns.
Capital growth was the main driver of total return performance delivering 7.2% however income return, at 1.6%, declined slightly from 2009 and is now at its lowest point in the index’s thirty year history.
Transactional activity continues to have a strong effect on the performance of the rural property asset, driving total returns up to 12.8% and capital growth to 11.0%. Active management of rural property, through developing new income streams, trading and tenancy management can lead to very fast 100% gains in capital values.
In comparison with other asset classes, commercial has outperformed the rural property market in 2010 but, unlike other UK markets, rural property did not experience negative returns during the downturn.
Over a three, five and ten year cycle, farmland remains the top performing asset class in UK property with returns of 6.3%, 12.0% and 13.% respectively. Commercial property only managed to deliver 3.6%, 2.4% and 3.2% over the same periods.
Against equities and gilts, farmland has fared comparatively well, outperforming both on a five and ten year basis but underperforming gilts in the shorter three year period.
Excess demand for property has fuelled the price and even though supply in 2011 is already much higher it will not be sufficient to peg back prices. Supply remains at a historically low level - with only 100,000 to 150,000 acres traded a year in the 2000s compared with 300,000 acres or more in the 1980s.
So have investors missed the boat? Richard Liddiard, Head of Rural Agency at Carter Jonas, thinks not: “The last decade has been hard for farming incomes with tightening margins and volatile prices. It would appear however that we are seeing a recovery in prospects as there is a growing realisation that more realistic prices need to be paid for food if we are to feed the population safely and sustainably.”
While the overall result for rural property is positive, there are some negative undertones. Higher commodity prices have boosted profits and returns for cereal farmers but are putting pressure on livestock farmers who buy the cereals as animal feed. There are traditionally strong livestock areas that are maintaining their position through intensification but more marginal areas may look to alternative uses away from livestock farming to survive.
What lessons might have been learnt on the 30th anniversary of the index?
Certainly rural investments have performed over 30 years with annualised total returns of 8.2%. Of course this has not all been plain sailing and there have been periods of negative returns in the mid 80s and early 90s. Smiths Gore and Carter Jonas feel that these downturns seem to coincide with the periods of sudden change in either tax or support for farmers. The message for government is that it needs to be careful when implementing changes of not distorting the market with sudden announcements. This is especially important if we are to feed an increasing population with farming methods that are sustainable and in low carbon system. Download the results 230KB
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