May 23 2013, Rural property delivered another year of strong growth for investors, narrowly missing out on a second year of double-digit returns, according to Carter Jonas and Smiths Gore, sponsors of the IPD Rural Property Index, as the results for 2012 were launched today.
Total returns of 9.9 per cent in 2012 outpaced those of commercial and residential property, while continuing to act as a substantial inflation hedge. The main driver of growth has been from capital value increases, which was 8.2 per cent during 2012 – higher than residential property which had 5.9 per cent capital growth, and prime commercial property, which saw capital values fall 2.2 per cent over the same period.
"Rural property has continued to stand out as an attractive capital hold since the downturn. While values for commercial property almost halved in some areas and the volatility of equities deterred risk-averse investors, rural property values only dropped 0.4 per cent in 2008 and have risen by an average of 7 per cent per year since the start of the recession in 2008, comments Richard Liddiard, head of Rural Agency at Carter Jonas.
Over the last five years, rural property has returned 8.9 per cent per annum, against 0.7 per cent from commercial property, 4.6 per cent from residential, 2.1 per cent from equities and 8.8 per cent from bonds. (IPD UK Annual Property Index, IPD UK Annual Residential Index, MSCI UK and JP Morgan UK 7-10 year).
Many also seek to take advantage of the beneficial tax status afforded to rural holdings.
Farming fundamentals underpin growth
For the £2.7bn of assets measured by the Index around the UK, improvements in the economic drives of the UK’s agricultural sector have underpinned this growth, as well as the increasing potential for alternative use.
Common Agricultural Policy (CAP) reform, which had led to fears about the reduction of financial assistance to farmers, will be more benign than originally thought. It continues to support the financial viability of UK farms, while growth in demand for UK farm commodities and food has similarly helped.
The horse meat scandal and other domestic issues have increased the demand for UK-grown and reared produce, while long-term fears about global food supplies continue to support UK food production.
Indeed, there is growing voice to the argument that agricultural produce is another form of ‘demographic-linked investment’, which, like elderly care, can lead to constant growth in demand.
Potential alternative use of land for renewable energy production is also an incentive. Although wind farms have proven divisive and planning permission can be tricky to obtain, solar farms and hydro-power are alternatives that are more accepted by the general public and are growing fast. And with long-term government-backed financial support and growing pressure from the EU to meet strict green targets, the potential to produce renewable energy is huge.
A private investment class
Lack of investment-grade stock to buy remains a hindrance, which makes investing at a large-scale reliant on doing off-market deals. For smaller private investors, there are many more opportunities to buy into the sector.
The beneficial tax status of the sector, with Inheritance Tax relief for owner-occupied land, acts as an incentive for many. Equally, the ‘long game potential’ – whereby a development opportunity such as a shopping centre or housing estate 20 years in the future – can considerably hike up returns.
"The continued strength of rural investment property shows that it has a serious part to play in investment portfolios that need to off-set volatility and risk with stable, solid performance," adds Richard Liddiard. "As well as good recent performance, longer-term returns will be boosted by the increasing demand for British farm products and the ongoing drive for new sources of energy, while continued unrest in traditional investment markets is pushing more and more investors into this sector."
Phil Tily, Managing Director of IPD for the UK and Ireland, said:
"A growing awareness of rural land has emerged in the last five years, as large and small investors are increasingly thinking outside the box to diversify their returns. For its diversification potential and capital hold characteristics the sector is hard to beat, and with improvements in the economic fundamentals underpinning the sector, rural land will continue to look attractive as an asset."