Farmland values still rising with increased demand from investors and overseas buyers, reports show

Written by Ray Clancy

A shortage of land and demand from investors and overseas buyers is helping to keep prices up for English farmland, according to new reports.

Values rose by 6.9% in the second quarter of 2010, taking growth in the past 12 months to 19.7%, the latest Knight Frank Farmland Index shows. And farmland has outperformed the commercial markets for the third consecutive year, the IPD UK Rural Investment Property Index, sponsored by Smiths Gore and Carter Jonas, shows. It says that capital growth value is the main driver of total return performance.

The average price of farmland is now £5,769/acre, the highest level recorded by the Knight Frank index. ‘Land is now worth almost 20% more than it was 12 months ago and we are predicting further growth of a least 10% over the next year,’ said Andrew Shirley, head of rural land research at Knight Frank.

‘A shortage of farmland for sale, combined with demand from investors and overseas buyers, has helped to ensure values continue to rise. Demand over the past 12 months has increased by about 9%, while supply has fallen by a similar amount,’ he added.

The report shows that farmland has been one of the best performing assets of the past 10 years and people see it as a sensible and secure place to put their money. And Shirley does not think that the increase in capital gains tax earlier this week will put investors of.

‘It is still better for a higher-rate tax payer to be taxed on a capital gain at the increased rate than income at 40%. In addition, a welcome increase in the lifetime allowance for Entrepreneurs Relief from £2 to £5 million will offset the rise in CGT for many people. This is because anybody eligible to claim the relief will pay CGT at only 10% on their first £5 million of gain if they sell their farming business,’ he explained.

It is not pretty farms that investors want, but bare land, according to Claire Glover, head of farm sales at Knight Frank. ‘We are currently seeing huge demand from a wide range of buyers, but in particular from private non-farming individuals, including a significant number of overseas buyers looking for a safe long term investment. Many see it as a hedge against inflation and more reliable than stocks, shares and other less tangible investments,’ she explained.

‘Of overarching importance to investors is the fact that farm land continues to perform well during recessions and is a useful asset to have in a portfolio. The capital drivers remain three fold; farmers buying land when the opportunity arises, people purchasing for lifestyle and leisure reasons and investors purchasing for the fiscal benefits,’ said Gerald Fitzgerald, head of property valuations and investments at Smiths Gore.

Land prices could be driven up even further by the changes to CGT, according to Simon Dixon Smith of consultants Savills. He said farmers and landowners have enjoyed a surprisingly benign capital tax regime and forward planning will allow future liabilities to be kept to a minimum under the change.

‘The increase is perhaps a fair compromise but although the lack of any taper or indexation will be a disappointment to long term holders of assets the change in CGT may drive up land prices further,’ he explained.

‘As the economy picks up and new capital gains are generated we could see a resurgence of interest in rollover relief into agricultural land, particularly from business sellers looking for a new asset class that is seen as a safe haven and Inheritance Tax efficient