Fall in farm commodity prices

The fall in farm commodity prices has cut the profits from rural investments in the UK.

The total return in 2015 was 5.5 per cent – a decline of about 5 per cent from 2014’s return of 10.4 per cent.  This is the most subdued return since 2008 and reflects a slowing in the market after several years of very robust returns.

These figures come from the IPD UK Annual Rural Property Index which is sponsored by Carter Jonas and Savills. The Index tracks the performance of 1,873 properties with a combined capital value of more than £3 billion.

Caution around future market uncertainty was reflected in rural land capital growth, which reduced to 4.1 per cent in 2015 from 8.9 per cent in 2014. The decrease in the rate of capital growth made the most significant contribution to the decline in the total return.

As head of Carter Jonas’ rural team in the South West I believe the market is patchy but there is no doubt that the fall in commodity prices has had a very real impact on farm incomes and this in turn has impacted on confidence in the farming community.

More recently, political debate around Britain exiting the EU and the effect this may have on the agricultural industry has further dented confidence.  Now the level of uncertainty has ratcheted up a notch since the Leave campaign won the day.  However the vote is not likely to have much impact on world commodity markets and therefore farmers and investors are likely to continue being selective about investing in farmland.

All these factors have contributed to the land market cooling as farmers and investors are concerned that it will be a while yet before confidence returns to the agricultural economy. 

But farming is a long term industry and although rural incomes returns remain low at around 1.3 per cent according to the index, where land comes available for the first time in a generation, neighbouring farmers will very often still be interested in buying it. 

This is not least because in the long term land has often been seen as an excellent investment and they aren’t making any more of it. 

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Diversify to maximise the performance of assets

Owners of rural land and property are advised to diversify to maximise the performance of their assets.

This is highlighted in Carter Jonas’ latest Model Estate report which since 2010 has tracked the annual performance of a notional agricultural estate against seven other asset classes, including residential property, commercial property, classic cars, fine wine, equities, antiques and gold.

The Model Estate showed a 4.7 per cent increase in value during 2015 which means the estate’s rank slipped to fourth place in the eight asset classes.

The let farms element of the Model Estate produced a return of just 4.2 per cent in 2015 compared with 24.3 per cent in the previous year. Growth in 2015 was driven by capital rather than rental values, although even this slowed as the agricultural land market began to cool over the course of the year.

Tim Jones, national head of the rural division at Carter Jonas said: “Net incomes, profitability and the serviceability of debt continue to be squeezed, and farmers are increasingly cautious about paying premium rental prices.

“While demand remains for tenanted large blocks of land, we have seen market rents plateau over the last 12 months, in part due to falling commodity prices. These combined factors have caused the decrease in 2015 total returns for the let farms element of the estate, when compared with the previous year.”

The Model Estate’s residential portfolio recorded a 20.7 per cent increase in value which was boosted by one-off capital gains rather than just house price or rent increases. This gain is largely attributed to the decision to convert a commercial property to residential by taking advantage of the new permitted development rights. 

This supports the notion that in order to maximise the value of rural property, landowners need to be alert to any opportunities that may arise and in recent times exploiting the relaxation of planning laws has certainly been something to keep an eye on. The potential to convert offices and farm buildings to residential use are very often the obvious diversification opportunities to consider.

Of the eight asset classes the Model Estate is analysed against, classic cars once again produced the highest return in 2015, of 16.6 per cent. This was followed by the UK’s residential sector which produced a total return of 9.5 per cent and then the commercial, recording a 7.2 per cent return.

As head of Carter Jonas’ rural team in the South West I can confirm these research findings are reflected in real life as owners of farms and rural estates look to generate alternative sources of income to augment their traditional income generated from let and in-hand farmland.    

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk