Rural Comment: High demand for agricultural land, viewed as a safe investment 24th June 2012

Economic turmoil across the continent has created widespread difficulties across numerous investment sectors, however the price of rural land in the UK continued to grow in 2011.

Commercial property values may be in decline across most of the country although the rising price of commodities, which has led to rising profitability in the rural sector, has attracted further interest in land as a safe investment.

Demand for agricultural land has strengthened throughout 2011 as investors continue their flight to safety. Both active farmers and investors proved acquisitive, due to the safe haven status of the asset class.

The restriction in the amount of land available and the weight of money moving in has led to considerable pressure on prices. Smiths Gore estimates that 127,000 acres were traded in 2011, while in the late 1980s over 300,000 acres were turned over each year.

Richard Liddiard, head of rural agency at Carter Jonas, said: "Agricultural land has continued to remain in high demand from a widening array of investors. The ongoing period of macro-economic uncertainty and turmoil has underpinned the need for safe havens for investment, and land has been a beneficiary of this trend."

"With limited stock levels available on the open market, prices have risen throughout 2011. Prime farmland values are forecast to continue to rise although at a slower pace than witnessed last year as the amount of land for sale remains relatively low. However, there is increasing evidence of a two tier market appearing with values of poorer quality farmland forecast to witness a decline."

"The significant tax advantages in holding agricultural land, for investors and individuals, have further reinforced its performance compared with alternative asset classes. The powerful tax advantages of holding land means there is little incentive to bring to the market, ensuring supply remains scarce, which will underpin current values."

Gerald Fitzgerald, head of valuations and investments at Smiths Gore, said: "Despite a significant increase in agricultural rents, of more than 20 per cent on average, income returns remained low, at 1.6 per cent, offset by the huge rise in capital values. Capital growth was 14.2 per cent, which, as always, is the main driver behind the total return of 15.9 per cent. So the sector remains very much a capital hold, rather than an income producing asset class.

"The two uncertainties are: the reform of the Common Agricultural Policy (CAP) in 2013 (to be implemented January 2014), which may impact on subsidies for farmers. However, it is increasingly unlikely that there will be any major adjustments to subsidies and so this is a minor risk. Secondly, the effect of commodity prices upon farming profitability, which have dropped back recently, have not necessarily impacted upon returns as yet. However, the highest commodity prices are unlikely to have been reflected in rent reviews."

Mark Weedon, associate director of Alternative Asset Investments, said: "Despite any concerns surrounding the inflationary pressures on the sector, rural property remains one of the best performing asset classes that IPD measures. Five year returns were 11.9 per cent, against the IPD All Property Index, which recorded - 0.7 per cent, whereas equities recorded 6.2 per cent.

"As a hedge against inflation it remains one of the most secure of the sectors we measure, which in the current market environment is quite exceptional. There are fewer safe capital holds in the UK, with each new economic crisis emerging. For the moment, rural property seems to be in a class of its own."

Gerald Fitzgerald, of Smiths Gore, said: "Importantly, the basic economic fundamentals of the sector remain secure - supply is low, demand is high. For the farmers themselves, profitability remains high and the outlook good."

"Even regulatory risks to the sector remain low. The UK government has avoided any kind of rural inheritance tax reform - and if the Labour government neglected to address the situation after 14 years in power, it is unlikely the Con-Dems will."