Despite weak commodity prices, investment returns for let agricultural property assets remain strong

Despite weak commodity prices, investment returns from traditional Let agricultural property assets remain strong. That’s the conclusion from the Bidwells Agri-Investment Index (BAII), published today.

The report reveals that although returns have weakened marginally in 2014 and 2015, they are still substantially higher than most conventional asset classes – with annualised returns over the nine years to 2015 at 16.74% for ‘Let’ and 12.08% for ‘Farmed’ , which compares to around 4% for the FTSE 100.

The BAII tracks the investment performance of more than £500m of agricultural and rural property in England – but with a strong bias towards the arable east. Unlike other indices, the BAII assesses and compares the returns from both Let and Farmed estates and is the only index of its kind in the UK which tracks actual farming profits against the value of land.

Farmed land is defined as that which is either occupied by the owner’s operational farming business, or managed through a Contract Farming Agreement, whereas the Let estates portfolio is comprised of a diverse range of rural property assets, which are let under a range of tenancy types and usually managed for investment purposes.

The report, which is now in its fourth year, has revealed that traditional Let agricultural property assets are more resilient to commodity price volatility, which continues to be the primary factor influencing returns from agricultural businesses.

The total return for BAII Farmed property in 2015 is expected to be 7.4%, compared to 11.58% for Let property assets.

Roland Bull, Partner at Bidwells, said: “The research has revealed the clear difference between Let and Farmed property in its resilience to the volatility of commodity prices.

“The Let element of the estate is protected to a greater extent from the short term volatility in the commodity markets, with more stable rental incomes and capital growth driven by tenancy reversions and non-agricultural development.

“2014 was the eighth consecutive year of double digit total returns in the BAII Let portfolio, with performance broadly in line with expectations at 13.57%. The Farmed portfolio, however, saw the worst results yet, in both income and capital terms, with a total return of 7.83%.

“One factor is that is that farm rents are typically reviewed on a tri-annual basis, so although an immediate drop in commodity prices will hit the tenant’s profitability, it may take some time to filter through to the investor.

“And the capital growth is derived, not only from the price rises in vacant farmland, but also from non-agricultural development and tenancy reversions.”

He added: “There is still very strong investor interest for the portfolio diversification benefits that agricultural land offers. We are still doing a lot of work for large diversified investors who are looking for the benefits that an allocation to agricultural property can offer.

“Despite weak commodity prices, investment returns from agricultural property remain strong and the characteristics of traditional Let property have ensured it continues to outperform.”

The report examines the recent performance of rural property investments in the context of other asset classes and considers the future prospects for the sector.

It examines the fact there have been signs of cooling in the UK land market, which has become increasingly location specific. It also examines the outlook for farm rents and the returns from specific agricultural sectors. It takes a detailed look at the 2015 harvest and commodity prices.

The report also includes an international update on US Farmland.

The full report can be read here:

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