Rural Property Performance

Investment weathers the storm

Rural areas are an economic asset and contribute significantly to Kent's economy. Almost 40% of Kent's businesses are located in rural areas and national research has highlighted higher rates of business start up in England's rural economies. New research suggests that rural businesses contribute in the region of £5.5bn in GVA to Kent's economy.

Broadband has enabled the location and growth of high-value businesses in rural areas - many of which are home-based. The advent of high speed domestic rail services will create more opportunities to develop and further diversify Kent's rural economy. Concerns about future food security, tax advantages of owning land and future opportunities have led to a considerable increase in the value of farmland. While this has been tempered somewhat by the current economic situation, it can be expected that the upward trend in value will return as the UK moves out of recession.

The rest of this article was kindly contributed by David Slack and Tim Cathcart of Smiths Gore.

The rural property market in the south east Rural property in the south east remains the highest performing property investment ahead of residential and commercial property, despite the total return on investment dropping to 1.7% in 2008.

Although the results may look weak, rural property performed well, as it did during the previous recession in 1990-1991, compared with other types of property investment. Rural property’s return of 1.7% compares well against commercial property (-22.1%) and residential property (-15.3%); it also outperformed shares and has done over the past three, five and 10 years.

Rural property in the IPD UK Rural Property Investment Index is a mixture of farmland, houses and rural commercial property. The spectacular increases in farmland values since 2006 have been the main driver of returns for rural property until this year. Farmland values reached their peak in mid 2008 and then dropped back to around the same level as at the start of the year – so there was little or no increase in capital values of farmland in the Index. Residential and commercial property in the Index fell in value during the year, typically by between 5-15%, which caused the capital value of all of the rural assets combined to fall by 0.7%.

The last 18 months have been the most active period for farm rent reviews in over a decade and the Smiths Gore agricultural rental survey shows that rents rose by an average of 25%, with some rising by more than 40%. This increase in rents was the major contributor to gross income growing by 7.0% across the Index, the highest annual rental growth since 1998; this growth is lower than the increase in agricultural rents, as not all farm rents were reviewed and neither were all of the residential, commercial and other tenancies.

Rural property is often considered a good defensive or counter-cyclical asset to have in a portfolio. The evidence from 2008 and also the previous recession in 1990-1991 supports this. Rural property has weathered the storm better than other property asset classes. It was the only property asset which produced a positive total return in 2008 and in the previous recession was the only asset class, other than gilts, that produced positive returns.

Smiths Gore expects the total return from rural property to remain positive in the medium term. Farmland prices should remain stable in 2009 and then rise by 2-4% per annum from 2010 onwards. This, combined with continued sales of strategic development land, reversions to vacant possession and sales to tenants, should produce modest positive capital growth. There are fewer farm rent reviews scheduled for 2009 and 2010 and, coupled with pressure on residential and commercial income, income growth will be lower than in 2008 but should still remain positive. Therefore we expect total returns to be positive in 2009 and in the medium-term, but below the 10 year average of 12.9% per annum.

The rural property market in Kent

Turning to the market in Kent, 2008-2009 has seen a number of farms and parcels of land coming to the market which are attracting good levels of interest. Sellers have clearly been holding back waiting for spring to arrive and for the land to look better coupled with the hopeful change in economic fortune. Demand has continued to outstrip supply in Kent and most of the land coming to the market has found buyers very quickly although it has become apparent during the summer that some of the initial froth has gone out of the market and land still needs to be realistically priced to achieve a quick sale.

Land values in Kent should continue to prove resilient and when put against other forms of investment still remain extremely attractive. This season a number of parcels of land have achieved very good prices at auction even amidst fairly strong competition. Notably Smiths Gore recently sold some land outside Canterbury that achieved £60,000 for 10 acres of sloped grazing land. More recently Smiths Gore took three pieces of land with option agreements to auction that were being held by one of the major house builders in their land bank. Two of these pieces of land sold for double the guide price and one piece achieved over five times the original guide price following some very competitive bidding.

Whilst there has been a reasonable market in bare land there has been a continued dearth of commercial farms coming on to the market but the few that have come to the market have achieved significant interest. The farm land market continues to be driven by farmers looking to extend their acreage and thereby reduce their fixed costs. For those farmers looking to diversify, there are a number of conservation charities in the market looking for amenity and protection land as well as investors looking for a safe haven away from the ravages of the financial investment markets.