Commercial Property News

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Monday, July 17, 2023

UK agricultural land returns halve in 2005 as capital growth slows

In 2005, UK tenanted farm land produced a total return of 9.4%, half the preceding year?s 18.6% and the lowest since 1999, the IPD UK Let Land Index 2006 showed.

By contrast, equity returns at 22% and commercial property at 19.1% outperformed the Index for the first time since 1999 and 2000 respectively. Residential property lagged behind at 8.1%.

Once again, total returns in 2005 were heavily reliant on strong capital growth, although the rate of increase was the lowest in 6 years. Capital values on all properties (including transactions) rose by 7.0% and by 6.9% on held property. The income return component edged down to 2.3%, some 20 basis points below the 2004 figure, making 2005 the lowest income-producing year since the index began in 1981.

As the tenants of agricultural holdings have continued to survive on low margins, so the importance of income as the driving force for purchase or retention of let land has dwindled. For investors in this asset class, there are "other reasons" to persevere, the main ones being fiscal, longer-term development opportunities, or the chance of obtaining vacant possession.

Despite a slowdown in the rate of return, the sustained bull market from 2000 to 2004 means that tenanted farmland is the top performing asset over 3, 5 and 10 years, ahead of IPD UK Commercial and Residential property. Let Land has also out-performed equities and gilts over 5 and 10 years. The 10-year annualised return for Let Land (including transactions) was 13.0% at the end of 2005. This is substantially above the 10-year return on UK equities at 7.9% and UK gilts at 7.7%. It is also ahead of IPD UK commercial property, which has returned 12.8%.