How good an investment is farmland?
Agricultural land has long been considered to be one of the most secure forms of investment, renowned for being held as a safe haven in the same regard as the likes of gold and diamonds, despite its relatively low returns on capital. But despite such a low yield agricultural land has much more to offer investors than just grazing livestock or growing cereals.
Farmland prices reached record levels during the second half of 2012
As global population growth is expected to reach nine billion in 2040 and with some predictions putting the population in 2050 as high as ten billion, the future outlook for land resources looks bright. There is an attraction to utilise less marginal land for renewable energy production through a range of resources whether it be exploration of natural gas, wind farms, hydroelectric schemes, production of biomass crops or development for solar farms. This demand has driven up values on the lower quality land grades. However, there is more behind the demand and attraction of agricultural land than simple agricultural outputs.
Land prices are rising due to a lack of supply more commonly on the back of tax benefits offered for ownership of agricultural land, incentivising non farming buyers.
One of the significant benefits is the Inheritance Tax relief offered to agricultural property, which would normally be charged at a rate of 40% on the value of the Estate worth more than £325,000. If the land is farmed in hand it qualifies for 100% relief on the land after two years of ownership. There are also benefits for owning land and letting it out to farmers under a tenancy agreement, which has the added benefit of a rising rental market. The alternative for non farming investors in farmland to retain control of the land without needing to purchase the equipment to actually carry out the farming operations is to enter into a contracting arrangement with existing farmers thereby sharing their resources.
There are also attractive benefits in terms of managing income tax where profits from farming can be offset against losses over a rolling period. Typically many of the farming expenses and some of the farmhouse expenses can be offset through the farm accounts.
Agricultural land also qualifies Entrepreneurs Relief if it ever sold and becomes liable for Capital Gains Tax. If the land is sold as a trading business the benefits are a taxation rate of 10% for qualifying tax payers rather than the typical 28% paid under normal provisions.
According to the Royal Institution of Chartered Surveyors (RICS) farmland prices rose just over 2% in the second half 2012 on both transactions and opinion based measures. The survey also notes that there is strong demand from commercial farmers keen to expand production on neighbouring land who end up competing against investment buyers. Not only have commodity prices grown to allow farmers to acquire land but also financial institutions are very keen to lend into the agricultural sector at long-term low rates as they appreciate the strength of security and the long-term capital growth previously seen with agricultural land.
The RICS survey identified a national average land value of £6,783 per acre, which is a record high reflecting the lack of supply in a high demand investment sector. Regionally the most expensive agricultural land is located in the West Midlands at £7,625 per acre with the least expensive being located in Scotland at £3,750 per acre, mainly reflecting the low price of pasture land. Surveyors expect further price increases over the next 12 months, concentrated in the commercial sector of the market.
So what are the likely returns? As with all secure long-term investments capital growth would appear to be the most significant benefit, above and beyond the initial return on investment, which would typically range between 1% to 2.5%. Capital growth has seen almost a doubling of land values in the last 10 years which has a backdrop of consistently generous farm subsidies and favourable fiscal policies coupled with the more recent strengthening of commodity prices.
However, investors need to be aware that whilst there are significant tax benefits to investing in farmland there are also risks attached particularly as Her Majesty’s Revenue and Customs (HMRC) are looking closely at investors who are acquiring farmland entirely for a tax benefit to qualify for the various tax benefits. The land owner of the land needs to be involved with the running of the farm on a day to day basis but more importantly, if investors are looking to acquire complete holdings with residential properties they need to ensure that the main farmhouse is being used entirely for farm purposes if they are going to qualify for inheritance tax relief.
So what does the future hold for agricultural land? Whilst tax benefits may come and go there is no doubt that those people who own and are in control of agricultural land in the future will benefit from consistent long term capital growth as well as attractive medium term incomes not only for good quality productive land but also less favourable and more marginal land which has non-agricultural resources. Small investors and institutional organisations are likely to become involved with agricultural property. They are looking to acquire commercial plots of land (of over 100 acres) and this looks set to only heighten demand in the market. With the outlook for increasing land values some investors are standing back to see how the market pans out. But those investors may well miss the boat as evidence to date shows no signs of values falling.
Complied by:
Gareth Lay Bsc (Hons) MRICS FAAV is an Associate and team manager in the Shrewsbury office, delivering valuation and property advice on a national level. Also acts as Bruton Knowles firm-wide expert on rural property matters.
Naomi Game MSc MRICS is a Senior Surveyor in a broad role delivering a wide range of professional advice and carrying out commercial estate management, from the Guildford office, as well as enhancing Bruton Knowles’ rural property expertise in the South East.
