Agricultural Assets Outperform
Thursday, July 01, 2010

Recent data has shown that returns from agricultural land and forest investments in the UK have consistently outperformed other asset classes in recent years. Indeed, institutional investors are beginning to show an interest in farm land around the world as growing demand for scarce resources puts upward pressure on land values.

Farmland property in the UK has outperformed commercial markets for the third consecutive year, delivering 8.2% last year, according to the IPD UK Rural Property Investment Index. The annual return is more than double the 3.5% delivered by commercial property, and considerably improved on 2008’s 10-year low of 1.7% IPD says, driven by capital growth.

The index, which is IPD’s first established valuation-based index and has a 29-year history, measures the ungeared performance of tenanted farm land comprised of 515,355 acres in 223 estates, worth just under GBP2bn and compiled from valuation and management records for individual farms and estates held by institutional and private investors.

All regions delivered positive total returns in 2009, led by the South East which saw double-digit performance, at 14.0%. The biggest year-on-year improvement was in the North West and North East which in 2008 saw -5.0%, the lowest total return recorded by any region since 1991. Performance bounced back with strong capital growth, to return 7.3% in 2009.

The West Midlands saw the strongest income return, 60 basis points above the all UK average, at 2.4%. Despite a strong performance in 2009, returning 11.0% and second only to the South East, Yorks & Humberside saw the highest volume of net disinvestment in the UK, at 5.7% of year end capital value.

There continued to be net disinvestments from tenanted farmland in 2009. Slightly down on 2008, this stood at 1.3% of year end capital value. Only three areas in the UK saw positive investment levels: the South East, West Midlands and North West & North East.

Rural property outperformed the main commercial markets as well as bonds, which delivered 3.5% and -0.3%, respectively, while underperforming residential property (11.0%) and equities (30.1%). However, over the three, five and 10-year picture, rural property consistently outperformed all asset classes.

Data from IPD also shows that forests in the UK have outperformed other asset classes in the past three years; total returns offered by investments in British forests reached 16.1% on an average three-year annualized basis by the end of 2009. By comparison, UK equities, fixed income and commercial property delivered returns of -1.3%, 6.9% and -8%, respectively.

A recent report by Reuters suggested that pension funds in both Europe and the United States are cottoning on to investment opportunities in farmland as a growing global population and increasing demand for scarce resources puts pressure on land supplies.

According to Reuters, TIAA-CREF, a US pension fund, has invested about USD2bn in farmland and is looking to double its agricultural holdings over the next few years.

Just 1% of the money invested in agricultural land globally is from institutional investors, suggesting that there is plenty of scope for pension and alternative investment fund managers to take a substantially larger share of the market.

One asset manager well established in the area of agricultural investment is Barings, which launched its Global Agricultural Fund in January 2009. The fund invests in a portfolio of companies predicted to benefit from the growing demand for global food.

"With interest in biofuels further increasing demand for foodstuffs, and global warming likely to put additional strains on supply, we believe that the business of feeding the world has emerged as an important long-term investment theme which should have a place in all well diversified investment portfolios," says Barings.