rural report 2012
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CHESTERTON HUMBERTS RESEARCH BRIEF – SPRING 2012
The Investment Case for UK Agricultural Land
RETURN TO THE COUNTRY?
CHESTERTON HUMBERTS RESEARCH BRIEF2
• AveragefarmlandvaluesinEngland&Walesreachedrecordlevelsin2011andChestertonHumbertsforecaststhattheywillincreasebyanaverageof6%perannumoverthenextfiveyears
• Growthinfarmlandvalueshasoutpacedequitiessincetheearlynoughtiesandresidentialpropertysince2007
• Overa5and10yearperiod,ruralpropertytotalreturnsoutperformedequitiesby690bpsand960bpsrespectively
• UKagriculturalincomegrowthoverthepastdecadewasoverthreetimeshigherthantheEU27average
Thecaseforinvestingintheagriculturalsectorisbecomingincreasinglycompelling.Agriculturallandisatangibleassetwhichoffersportfoliodiversificationopportunities,andthereislowcorrelationbetweenyieldsforfarmlandandthoseforothermainstreamassets.Thishasbeenofparticularrelevanceduringthepost-globalrecessionyearswhenagriculturallandhasperformedwellincontrasttotheuncertaintysurroundingthemoreestablishedassetclasses.Moreover,farmlandinvestmentshavehistoricallyprovidedaneffectivehedgeagainstinflationandrepresentarenewableresourceunlike,forexample,oilandpreciousmetals.
TheUKadditionallyofferstaxplanningincentivesassociatedspecificallywithagriculturallandwhichfurtherenhancetheattractivenessofthesector.Theserelateprincipallytoincometax,capitalgainstaxandinheritancetax.Furthermore,theUKpropertysystemistransparentandofferscleartitleto
owners,withinastablepoliticalandeconomicenvironment.
Investorinterestinagriculturallandhasincreasedsincetheglobalrecessionwithwealthyindividuals(forinvestmentandlifestylepurposes),privateequityfunds,institutionsandspecialistagri-fundsallrepresentedalthoughthemajorityoffarmlandtransactionsareaccountedforbyfarmerslookingtoexpandoperationsand,inthecurrentenvironment,takeadvantageofhighsoftcommodityprices.ForeignpurchasershavebenefittedfromtherelativeweaknessofSterlingoverthepastfewyears.
Accessingthemarketcanbedifficult,however,asthereiscurrentlyashortageofavailablelandandaround25%ofdealswhichtakeplacearetransactedoff-market.Transactionvolumein2011wassimilartothatrecordedin2010andwasalittleunder5%higherthanthe10yearannualaverage.
return to the country? The Investment Case for UK Agricultural Land
Thecombinationofagrowingpopulation,risingsoftcommoditypricesandthedrivetofindsustainablealternativefuelsourcesisplacinggrowingpressureonthesupplyofagriculturallandwhichinturnisattractingincreasinginvestorinterest.Thisreportexaminestheperformanceoftheagriculturalsectorovertimeandassessesitslongertermprospects.
AGRICULTURAL LAND AS AN INVESTMENT ASSET CLASS
INTRODUCTION
Agriculturallandisatangibleassetwhichoffersportfoliodiversificationopportunities,andthereislowcorrelationbetweenyieldsforfarmlandandthoseforothermainstreamassets.
CHESTERTON HUMBERTS RESEARCH BRIEF 3
Institutions
Private Equity Funds
Agri-Funds
Private individuals/Family Offices
Farmers62%
22%
8%
5%3%
Source:RICS&ChestertonHumbertsResearch
Figure1:UKfarmlandpurchasersbytype:2008-11
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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source:Defra/RICS
Figure2:reportedfarmlandtransactions
AccordingtotheIPDRuralPropertyInvestmentIndex,thesectorintheUKhasdeliveredsuperiortotalreturnscomparedtocommercialproperty,residentialpropertyand
equitiesoverathree,fiveand10yearperiodandhasoutperformedgiltsoverafiveand10yearperiod.
KEY PERFORMANCE INDICATORS
CHESTERTON HUMBERTS RESEARCH BRIEF4
-4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00%12.00%
14.00%16.00%
CommercialProperty
10 year5 year3 year1 year
ResidentialProperty
RuralProperty
Gilts
Equities
Source:IPD
Figure3:UKnominaltotalreturns,ungeared,asatend-December2010
AveragefarmlandvaluesinEngland&Waleshavealmostquadrupledsince1995andtheRICSRuralLandMarketSurveyreportedthattheyreachedarecordhighin2011of£20,722perhectare.Yearonyeargrowthof
averagefarmlandvalueshasoutpacedthatofequitiessincetheearlynoughties,residentialpropertysince2007andhasonlybeenovertakenbygoldinthelasttwoyears.
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0
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£ per hectare
Source:Defra/RICS
Figure4:AveragetransactedfarmlandpricesinEngland&Wales
Yearonyeargrowthofaveragefarmlandvalueshasoutpacedthatofequitiessincetheearlynoughties.
CHESTERTON HUMBERTS RESEARCH BRIEF 5
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19971998
19992000
20012002
20032004
20052006
20072008
20092010
2011
England & Wales Residential
Farmland Values
10 Year Gilts
FTSE All-Share
Gold
Index: 1995=100
Source:LandRegistry,BoE,RICS
Figure5:GrowthinEngland&Walesfarmlandvaluesvsgrowthofselectedassets
Totalrealincomefromfarming(TIFF)hasbeenvolatileoverthepastfourdecadesbuttrendedupwardsduringthenoughtiesduringwhichperioditmorethandoubledinreal
terms.Overthepastdecadelivestockoutputhascontributedonaveragearound54%oftotalgrossfarmoutputcomparedtocropoutputwhichhasaveragedaround34.5%.
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£million
Source:Defra
Figure6:TotalrealincomefromUKfarming(TIFF)
UKagriculturalincomegrowthoverthepastdecadecomparesfavourablywiththerestofEurope.AccordingtoECstatistics,estimated2011incomefromUKagriculturalactivitywasjustunder83%higherthanin
2000,whereasthecorrespondingfigurefortheEU27countrieswas24.5%andfortheEurozonecountriesincomein2011was4.2%lowerthanin2000.
CHESTERTON HUMBERTS RESEARCH BRIEF6
Index: 1995=100
2000 20112000 2002 2003 2004 2005 2006 2007 2008 2009 2010
155
145
135
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115
105
95
85
75
EU (27 countries) EU area (16 countries) United Kingdom
Source:Eurostat
Figure7:Incomefromagriculturalactivity:UKvsEU27vsEurozone
Note:2011dataareestimates
Thetypeoftenancyagreementcansignificantlyaffectrentalincome.AveragerentsforfarmlandletundertheAgriculturalTenanciesAct1995arecurrentlyover1.75timeshigherthanthoseregulatedbytheAgriculturalHoldingsAct1986andhaverisenby36%forarablelandandby35%forpasturelandbetweenH12009andH22011,whilethecorrespondingincreasesforlandletundertheAgriculturalHoldingsAct1986aremuchlowerat12%and9%respectively.Furthermore,thegapbetweenrentsforfarmlandletundertheAgriculturalTenanciesAct1995comparedtotheAgriculturalHoldingsAct1986haswidenedbymorethan20%sinceH12009.
EfficiencyintheUKagriculturalsectorhasimprovedconsiderablyoverthepastfourdecadesthankstoadvancesintechnology,thegrowthoflarge-scalecapitalintensivefarmsrunbycorporateownersandtheimpactoffarmingpolicychanges,notablytheCommonAgriculturalPolicy(CAP).AccordingtodatafromDefra,totalfactorproductivityforthesectorincreasedby51%between1973and2010.
OUTLOOK
Anumberoffactorspointtoapositivelongtermoutlookfortheagriculturalsector.Increasingaffluenceandchangingpatternsofconsumptionarealreadyleadingtorisingpercapitademandforfoodandtheworld’spopulationcouldreach9.3billion(a35%increase)by2050accordingtoUNmedium
scenarioforecasts.Thiswillplaceincreasingimportanceonagriculturalresourcesandannualglobalconsumptionofwheatandcerealshasalreadyoutstrippedproductioninsixoutofthepast11yearswiththeshortfallhavingtobemadeupfromexistingstocks.
Althoughdisplayingafairdegreeofvolatilityoverthepastthreedecades,worldfoodpriceshavenonethelesstrendedupwardsoverthisperiodandin2011reachedrecordlevels.ThevalueofUKfoodexportshasalsorisenstronglyduringthenoughties(+83%),helpedbytherelativedeclineofSterlingagainstthemajorinternationalcurrenciessince2007.Itishighlylikelythatfoodpriceswillcontinuetotrendupwardsoverthelongertermgiventhemountingpressureonconsumptionfromtheexpandingglobalpopulation.
Technologyadvancesshouldresultinimprovedcropyieldstherebymakingfarmingmoreefficientandprofitableaswellasenablingthefurtherdevelopmentofusefulnon-foodcrops,rangingfromplasticstopharmaceuticalsandbio-fuels.
Theincreasingimportanceofthebio-fuelssectorcanbeseeninitsgrowingshareofUKcropoutputwhichtripledduringthenoughtiesfromaround3%in2000to9.1%in2010.ThereareseveralGovernmentschemesdesignedtopromotegreateruseofrenewableenergysourcesandthe2009RenewableEnergyDirectivehassetatargetofdelivering15%(comparedto3%in2009)oftheUK’senergyconsumptionfromrenewablesourcesby2020.
Technologyadvancesshouldresultinimprovedcropyieldstherebymakingfarmingmoreefficientandprofitableaswellasenablingthefurtherdevelopmentofusefulnon-foodcrops.
CHESTERTON HUMBERTS RESEARCH BRIEF 7
Onthesupplyside,theamountofpotentiallyusableagriculturallandisfiniteandalbeitreclamationispossibleitisanexpensiveandnotalwayssuccessfuloption.Inthefaceofthelikelygrowingsupply/demandimbalance,farmoutputpricesarelikelytoriseasarelandvalues.WeforecastthatUKfarmlandvalueswillincreasebyanaverageof6%perannumoverthenextfiveyears.
Thereareissueswhichwillneedaddressing.Landdegradationasaresultofchemical,physicalorbiologicalchangespresentsarisktothefuturecapacitytoproduce.However,prudentlandmanagementcombinedwiththeefficientuseoftechnologyshouldlargelycountertheseeffects.Forexample,accordingtotheEuropeanCommission,thelong-termapplicationofcompostwillestablishhighernitrogenlevelsinsoilswhichshouldenablecomposttoreplacesyntheticfertilisers.
Thepotentialrisksofclimatechangearewell-documented,notablywithregardtowateravailability,pestsanddiseases.
However,climatechangecanalsobringopportunitiesincludinglongergrowingseasons,reducedfrostdamageinthewinteraswellascreatingpotentialnewlocationsforcrops.ArecentDefrareportconcludedthatwarmertemperaturesandhigherconcentrationsofCO2intheatmosphereshouldleadtohigheryieldsofmanycropscurrentlygrownintheUK.
Governmentpolicy,bothatUKandinternationallevel,willalsobecrucialindeterminingthefuturewell-beingofthesector.TheEU’sCommonAgriculturalPolicy(CAP)isthemostimportantframeworkunderwhichUKfarmerscurrentlyoperateandoveronethirdofitsbudgetisspentondirectpaymentstofarmers.LastOctobertheEuropeanCommissionpublisheditsproposalsforareformofCAPeffectivefrom2014-2020butthepackagehasalreadybeencriticisedbyUKgovernment.Weawaittheoutcomeoftheconsultationprocesswithinterest.
US D
ollars per metric tonne
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Wheat Maize Barley
19801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011
Source: IMF
Figure8:WorldCerealPrices1980-2011
Thecontentsofthisreportareintendedforthepurposeofgeneralinformationandshouldnotberelieduponasthebasisfordecisiontakingonthepartofthereader.Althougheveryefforthasbeenmadetoensuretheaccuracyoftheinformationcontainedwithinthisreportatthetimeofwriting,noliabilityisacceptedbyChestertonGlobalforanylossordamageresultingfromitsuse.ReproductionofthisreportinwholeorinpartisnotpermittedwithoutthepriorwrittenapprovalofChestertonGlobal.March2012.
CONTACT
David HebditchHeadofRuralDivisionT:+44(0)1823348290E:david.hebditch@chestertonhumberts.com
Andrew PearceDirectorRuralLincolnT:+44(0)1522516830E:andrew.pearce@chestertonhumberts.com
Neil GladwinDirectorRuralTauntonT:+44(0)1823348294E:neil.gladwin@chestertonhumberts.com
David PardoeDirectorRuralSalisburyT:+44(0)1722342393E:david.pardoe@chestertonhumberts.com
Christopher JerramDirectorRuralChippenhamT:+44(0)1249444555E:christopher.jerram@chestertonhumberts.com
Harry BainesDirectorRuralStamfordT:+44(0)1780758093E:harry.baines@chestertonhumberts.com
Craig HortonDirectorRuralMarlboroughT:+44(0)1672519111E:craig.horton@chestertonhumberts.com
Richard SavilleDirectorRuralPetersfieldT:+44(0)1730862043E:richard.saville@chestertonhumberts.com
Caroline LawrenceAssociateDirectorRuralTruroT:01872422065E:caroline.lawrence@chestertonhumberts.com
Nicholas BarnesHeadofResearchT:+44(0)2030408406E:nicholas.barnes@chestertonhumberts.com
ChestertonHumbertsisamulti-disciplinarypropertybusinesscoveringResidentialSales&Lettings,Estate/PropertyManagement,International,RuralandCommercialwith70officesworldwide.
ChestertonHumberts’RuralDivisionpridesitselfwiththeexpertisethatitsknowledgeableprofessionalRuralTeamshavegainedovermanyyearsexperienceintheruralpropertysector.ThecombinedspecialismsoftheTeamsrangefrominvolvementwithfarmers,landownersandestateownerstoensuingadviceandworkinestatemanagement,salesandacquisitions,professionalservices(includingvaluation),planningandequestrian.
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