IPD UK Annual Rural Property Index Results for the year to 31st December 2013
70
2000
60
Index value (shaded area)
40 30 20
1000
10 0
% return per annum (lines)
50 1500
-10
500
-20
The IPD UK Annual Rural Property Index measures un-geared total returns to direct investment in a sample of tenanted farmland. At December 2013 the sample consisted of 4208 assets, with a total capital value of just under ÂŁ3.1bn and a total return for the year of 12.3%
-30 0
-40 Dec 83
Dec 88
Dec 93
Dec 98
Dec 03
Dec 08
Rural Property Investment Index
Commercial Property
Rural Property Investment
Residential Property
Dec -13'
IPD UK Annual Rural Property Index Total return %
Total return % 1yr
Income return % 1yr
Capital growth % 1yr
3yr
5yr
33yr
1531.5
12.3
1.4
10.7
12.4
10.9
8.6
1565.1
1733.0
10.7
5.7
4.8
7.3
8.0
9.0
318.9
365.8
14.7
2.7
11.7
11.7
11.2
-
Total return index Dec-2012
Total return index Dec-2013
Dec 1980= 100
Dec 1980 = 100
Rural property
1364.0
Commercial property Residential market lets*
*Index based at December 2000. Data sources: IPD UK Annual Property Index, IPD UK Residential Property Investment Index.
Comparative data Equities Bonds
3207.4
3799.9
18.5
-
-
8.6
12.9
11.7
-
-
-5.2
-
-
4.8
4.5
-
Data sources: MSCI, J.P. Morgan
Sponsors
Disclaimer Š IPD (Investment Property Databank Ltd.) 2014 All rights conferred by law of copyright, by virtue of international copyright conventions and all other intellectual property laws are reserved by IPD. No part of the UK Rural Property Investment Index may be reproduced or transmitted, in any form or by any means, without the prior written consent of IPD. This Index is neither appropriate nor authorised by IPD for use as a benchmark for portfolio or manager performance, or as the basis for any business decision. IPD gives no warranty or representation that the use of this information will achieve any particular result for you. IPD has no liability for any losses, damages, costs or expenses suffered by any person as a result of any reliance on this information.
Rural property investment performance
Headline results
UK market total return % pa, showing effect of transactions
• In the 12 months to December 2013, the IPD UK Annual Rural Property Index returned 12.3%, higher than the 9.4% seen in 2012.
35 30 25 20
• Capital growth, at 10.7%, drove the returns, while income return dropped to 1.4%, its lowest point in the index’s 33 year history.
15 10 5
• Transaction activity had little impact on performance with the overall total return to all assets also at 12.3%.
0 -5 -10 -15
1981
1988
1994
Transactions impact
2000
2006
2013
Universe Total Return
• There was a continuing net disinvestment from tenanted farmland within the IPD index, standing at -1.6% of the value of the Index in 2013.
Market Total Return - Held properties
Other asset classes • The IPD UK Rural Property Index outperformed the commercial property market in 2013, with the IPD UK Annual Property Index achieving a total return of 10.7% for the year.
Investment performance by asset class, % pa 20
Rural Property
Equities
Commercial Property
Bonds
Residential Property
15
• Over three, five and ten years, farmland has outperformed all core UK property sectors, with returns of 12.4%, 10.9% and 12.5% respectively. UK property delivered 7.3%, 8.0% and 6.3% over the same periods.
10 5
• Against equities and gilts, commercial farmland compares well, outperforming both on a three and ten year basis, though underperforming the more volatile equities market in 2013 and over five years.
0 -5 -10 2013
3yrs
5yrs
10 yrs
33 yrs
Market commentary (provided by sponsors) Total return and the income & capital components, held property 2013 % 22 20 18
Most of the return is generated by rising values (10.7% capital growth in 2013). Although the income, which is mainly in the form of rents paid by farmers to use the land, is small (1.4% of capital employed), rents are rising due to it being a profitable period for farming.
16 14 12 10 8 6 4 2 0
Rural property continued to generate impressive returns for investors in 2013. Indeed, the sector has performed well throughout the recession, producing a 10.9% total return during the last five years, outperforming all other property types and reinforcing its reputation as a valuable element of an investment portfolio.
Mainly Cereals
Intensive Arable
Capital Growth
Dairy
Income Return
Mixed Cropping Total Return
Cost breakdown on held properties 2013 % External Management Fee/ resident agents fee Insurance Repairs & Maintenance Other
There has been a considerable increase in activity in the investment market this year with purchasers chasing quality holdings. For the last few years we have become used to a steady trickle of investments coming to the market, with most of the difference in values related to the expectations about the reversion and tax status. This year we saw some better quality investment farmland coming to the market, of primarily arable holdings on fully repairing terms, which sold for prices well in excess of the guide prices. Just as we are seeing in the main farmland market for farms without sitting tenants, there is increasing price differentiation for quality, where investors are seeking large good quality arable holdings that offer the best opportunities for long-term rental and capital growth. Investors seem much more optimistic about the arable sector’s profitability, possibly reflecting the higher commodity prices and better ability to control costs. Investors therefore appear to be being driven by asset performance fundamentals and not just seeing the investment market as a cheaper form of tax vehicle.
Rural property investment performance
As a result, there has been a considerable drop in yields, especially on arable investments over the year. There has also been much more interest and activity from new private purchasers coming into the market. They have primarily been seeking arable units on fully repairing terms to reduce risks from repair surprises. Furthermore since these are easier to manage, they can be controlled from a great distance away and thus appeal to a much wider range of purchasers. The fall in yields has not happened for all farm types, with more marginal, lower quality land investments struggling to sell, to such an extent that there is almost a 50% difference in yields between the best and worst. Another factor in the market is rising farm rents. For a number of years, the higher rents being agreed for new open market lettings have been dismissed as possibly a blip. However there is a growing realisation that this rise is more long-term and that the difference in rental value between Agricultural Holdings Act and Farm Business Tenancies had become unrealistic. We are therefore starting to see rents on investment farms, with Agricultural Holdings Act tenancies, rising by significant percentages, although many landlords and tenants are phasing in this market evidence over several rent review cycles. The effect is rising investment capital values due to both expected rent reviews and agreed rents; again, this is much more of a factor for the arable units than livestock units, reflecting the sectors’ profitability. Looking forward, the prospects for income return remain positive. The recent period of profitability for farming should continue based on the outlook for commodity prices, further helped by the reform of the Common Agricultural Policy which was as benign as it could have been. This will support farm rents, which we expect to continue rising over the medium-term (5 years).
Rural property investment including transactions Total return
Income return
Capital value growth
Regional variations (annualised) Total return
1yr
3yr
5yr
South East
9.7
9.3
10.4
South West
12.3
13.8
12.4
Eastern
9.6
12.1
9.8
East Midlands
18.9
16.7
13.0
West Midlands
15.4
14.8
11.4
Yorks & Humberside
5.7
10.0
9.9
North West & North East
7.7
7.1
8.4
Other
8.2
10.2
7.3
All UK
12.3
12.4
10.9
Income return
1yr
3yr
5yr
South East
1.6
1.6
1.6
South West
1.5
1.5
1.5
Eastern
1.5
1.4
1.5
East Midlands
1.1
1.5
1.7
West Midlands
1.5
1.9
2.0
Yorks & Humberside
1.6
1.7
1.7
North West & North East
1.6
1.5
1.5
Other
1.6
1.6
1.4
All UK
1.4
1.5
1.6
Capital growth
1yr
3yr
5yr
South East
8.0
7.6
8.7
South West
10.6
12.1
10.8
Eastern
7.9
10.5
8.2
East Midlands
17.6
15.0
11.2
West Midlands
13.7
12.7
9.2
Yorks & Humberside
4.1
8.2
8.1
North West & North East
6.0
5.6
6.9
Other
6.5
8.5
5.8
All UK
10.7
10.7
9.2
Rural property investment held properties only Index total return Dec 1980=100
2009
9.5
1.7
7.7
1331.2
2010
12.6
1.6
10.8
2011
18.1
1.5
16.3
2012
12.2
1.5
10.5
2013
12.3
1.5
10.7
Total return
Income return
Capital value growth 6.6
Gross rent passing growth % 6.9
Initial yield
8.4
1.8
1498.9
9.0
1.6
7.3
3.9
1.8
1770.4
15.6
1.6
13.8
24.9
1.7
1986.2
9.4
1.6
7.7
4.4
1.9
2229.7
12.3
1.4
10.7
5.3
1.8
Annualised return over the last: 3 years
14.2
1.5
12.5
12.4
1.5
10.7
11.1
5 years
12.9
1.6
11.2
10.9
1.6
9.2
8.8
10 years
13.8
1.9
11.7
12.5
1.9
10.4
5.1
20 years
14.2
2.9
11.0
12.7
2.9
9.6
3.8
33 years
9.9
3.7
6.0
8.6
3.6
4.8
2.8
2.1
Index composition — 2013 overview
Index construction The IPD UK Annual Rural Property Index measures un-geared total returns to direct investment in a sample of tenanted farmland. It is compiled from valuation and management records for individual farms and estates held by institutional and private investors. Data is collected from investors and managing agents and audited by IPD. All year-end valuations used in the Index are conducted by qualified valuers working to RICS guidelines. Confidential tenant names are not disclosed to IPD. At December 2013 the sample consisted of 4208 farms/estates with a total capital value of just under £3.1bn. The Index shows total returns on those properties that have been held throughout the year without any part purchases or sales. This basis is the most appropriate for comparison of the Index results with other asset classes. However, the realisation of profits from reversions to vacant possession and active management, which frequently involve part sales or purchases of small parcels of land or buildings, are both integral aspects of the rural investment market. Further analysis on the total market performance is available from IPD. The Index shows annual time-weighted total returns calculated by chain linking monthly returns to capital employed. In any month: • Total return is the sum of capital and income return on capital employed. • Income return is income receivable net of property management and other irrecoverable revenue expenditure as a percentage of capital employed in that month. • Capital growth is the change in capital value from one month to the next, net of any capital expenses and receipts, as a percentage of capital employed. • Capital employed is the capital value at the start of the month plus the gross purchase price of any whole or part purchases and any on-going capital expenditure. The monthly returns are the basic building block for returns over all other periods. Annual returns are calculated by chain linking 12 monthly values. Annual time-weighted returns calculated in this way require details of monthly cashflows and monthly capital values. Where monthly valuations are not available, IPD computes estimated values by interpolation between successive quarterly or annual valuations.
Index progress Total value (£m)
Number of acres*
Number of assets
1981
487
512,161
-
2004
1,606
569,989
-
2005
1,657
708,233
-
2006
1,766
697,023
-
2007
2,249
676,027
-
2008
2,097
586,335
-
2009
2,097
516,412
-
2010
2,258
541,492
-
2011
2,594
506,593
-
2012
2,736
395,575
2,682
2013
3,090
338,340
4,208
* Where acreage data is available; £1830m equivalent to 59.2% of index value at December 2013
Type of lease
Number of tenants
AHA - FRI
169
AHA - Traditional Lease
445
Farm Business Tenancy
574
Regional breakdown At end 2013
Weight by region (% cap val)
Capital value (£ per acre*)
Number of assets
South East
17.3
6,745
140
South West
21.1
6,037
548
Eastern
19.8
3,931
135
East Midlands
15.9
6,778
334
West Midlands
8.2
6,701
108
Yorkshire & Humberside
3.8
6,867
21
Northern England
7.0
7,219
33
Other
6.9
3,679
199
* Where acreage data is available; £1830m equivalent to 59.2% of index value at December 2013
• Initial yield is current net rent passing divided by year-end gross capital value. • Net investment is the sum of gross purchase costs, development expenditure, and costs of all capital improvements, less net sales receipts and all other capital receipts summed over the period. • Turnover is the sum of gross purchase costs, net sale receipts and all other capital expenditure and receipts summed over the period. The historical figures are unfrozen, thus any new funds or changes to current funds are reflected in the Index.
Contact Rural market:
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