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A view on Agri Investing: Q&A with Ian Hepburn, Head of Private Property Search, Strutt & Parkers buying arm

Date: 23 Jun 2011

Citywealth

How are your clients investing in agriculture?

In my experience, investors buying farmland, farms and estates in the UK fall mainly into 2 categories:
Individuals – these are successful businessmen either from the City or those who have sold their own businesses who are looking to invest in farmland for a variety of reasons but mainly to protect their wealth (they see land as a safe haven, particularly UK farmland), a place to live (they are much more interested in buying farms and estates rather than bare land), Capital Gains Tax and Inheritance Tax advantages (particularly with in-hand farmland), amenity and sporting potential and, finally, income generation and capital appreciation. Hedge Funds – contrary to a lot of commentator’s beliefs, very few hedge funds have invested directly into UK farmland. Some funds have been set up to enable investors to purchase farmland as part of a consortium, others have been set up to invest in UK farmland in other countries such as Brazil, Argentina, Eastern Europe indirectly through farming/land owning companies.

One of the major funds which has been involved in the direct purchase of UK farmland over the last three to four years has been BlackRock through its Agriculture Fund. We acted for this fund buying farms. There are very few other funds, if any, which have purchased farmland and subsequently managed the land on behalf of its investors. BlackRock’s investment criteria was to buy commercial arable farms in the East of England with as little residential value as possible.

What can go wrong?

The UK land market has seen a meteoric rise in the last 5 years and as with any other market, values can go down as well as up. Both individual investors and hedge funds are more alive to this fact than any other kind of investor but they must also appreciate that property is much more illiquid than equities or bonds. The commodity market for grains and oilseeds has a direct influence on farming profitability and so too with input costs where the oil price will have a direct bearing on fertiliser and fuel costs.

Have you seen agri-funds popping up?

As mentioned the major agricultural land fund which has emerged over the last four years is BlackRock Agricultural Fund which was set up not only to invest directly into UK farmland as part of its overall portfolio along with equities in agri-businesses and commodities but also to manage those farms purchased in hand. Other funds have been set up in a different way where they are investing in UK land on behalf of a consortium of investors but, to my knowledge, they are investing in land only and not equities or commodities.

Are prices going wild for land?

We have seen an increase in average arable land prices for grade 2/3 farmland moving from £3,000 per acre in 2006 to benchmark values today approaching £8,000 per acre. There have been exceptional examples of farms changing hands in the last year where bare land arable values have been closer to £10,000 per acre and even more in certain cases. It is very difficult to predict where prices will go from here but one of the key driving forces of the market is lack of supply and also the fact that UK farmland has looked cheap in comparison to some of its European neighbours. Between 2006 and 2011 there have been peaks and troughs, one of the high points being in 2008, just before the financial meltdown, where prices reached £7,500 per acre, dropping back to under £6,000 per acre the following year. This demonstrates the fluctuation in the marketplace.

Is investing in agricultural land the new gold?

Both individuals and funds see UK farmland as a “safe haven”. Returns in farmland have historically been low in comparison to equities and other investments. Farming yields produce between a 1.5% – 2% yield on a rental basis and maybe more if the investor intends to farm in-hand but he also runs the risk of lower returns for reasons stated above.

What key things would you advise clients looking to invest in farmland?

As with all other forms of property investment, location and quality are the two key factors. This applies to individual investors looking for their farm or estate where they are attracted to the prime land owning counties in the south of England, ranging from Gloucestershire, Hampshire, Berkshire, Oxfordshire down to Dorset, to the commercial farming areas of eastern England where the best commercial farmland is located in East Anglia, Bedfordshire, Lincolnshire up to Yorkshire. Individual buyers are inevitably looking for a principal house, protected by its own farmland without road noise or any other blights and are even more attracted to properties where there is sporting and amenity value. One of the rarest of breeds is the estate which contains a prime manor house, surrounded and protected by its own land with a commercial farming enterprise with sporting, including fishing and a shoot, and will always command a premium if brought to the market. For commercial farmland, quality of land is paramount and the infrastructure involved in the form of good farm buildings, grain storage and roads, tracks within the farm, drainage etc are also important features.

What are the rules of investing in agriculture?

Whether the investor is looking to buy on his own account or as an investment for a hedge fund, buyers must accept that land has to be considered as a longer term investment than, for example equities, and its illiquidity, particularly if selling in a difficult market. Given the laws, rules and regulations surrounding agricultural and land ownership, there are also many pitfalls to overcome when purchasing land.

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