Rural English estates continuing to perform well as an investment, latest survey shows

The investment performance of rural estates in England, boosted by the strong growth in farm land values, continues to perform well against other asset classes according to a new survey.

The Savills 2013 Estate Benchmarking Survey shows that average gross income on all estates increased by 5.3% to £212 per acre, which is a continuation of the upward trend that began in 2001.

In the survey year to 05 April 2013, the average total return for on let property was 9%, although the real estate firm said that it is noteworthy that this was primarily capital growth at 7.7% and just 1.3% of income return.

The agricultural and residential sectors performed best during this survey year with increases in total income of 2.3% and 4.6% respectively.

The research also shows that there was a substantial bounce back in the fortunes of the commercial sector, where total income increased by 21%, but the economy and bad weather hit the leisure sector and incomes fell by a further 7.3%, having fallen 7.1% during the 2012 survey year.

At a regional level the survey shows that location is a key contributing factor to the opportunities presented to individual estates.

Agriculture is the main income stream in the eastern regions of England representing over half of gross income while it is just 24% in the South East, where income from residential property accounted for an average of 46% of gross income compared with just 26% in the East Midlands and North of England.

The agricultural assets of rural estates continued to perform well, keeping pace with inflation, and all types of agricultural rents strengthened, while the area of land occupied on FBTs continues to increase and now represents 40% of the total let area.
Due to the difficult harvest in 2012 in hand farm, that is net income after deduction of property repairs, insurance, third party rents and interest on borrowings, fell by 33% and income from contract farming enterprises fell by a similar proportion to £111 per acre.

The firm expects pressure on tenanted and in hand operations to continue as the additional costs of re-drilling 2013 harvest winter crops with spring crops hits cash flows into the 2014 harvest year.

It points out that a detailed analysis suggests that active management and engagement with tenants is essential for maximizing returns and opportunities for both parties in all sectors including agriculture.

Income from residential property grew by 4.6% to average £8,723 per property. This growth is a combination of rental increases and a continued increase in the proportion of ASTs, now 56% of all properties compared with 50% in 2011.

For the first time the survey looks at average AST rents by house type. Like agricultural rents this showed a huge diversity in rental values ranging from £31,000 per year for a manor house to under £7,000 per year for a one or two bedroom flat. Evidence suggests that a two tier market may be developing as the demand for larger residential rental properties weakens in some regions with running costs being a decisive factor.

Commercial income bounced back for the 2013 survey year and increased by 21%. The take up of commercial workspace on rural estates has improved and the relaxation of the planning regulations introduced in May is set to stimulate this further.

Average rental income from telecom masts fell by 12% to average £5,287 per mast. This follows four years consolidation from a peak of £7,315 per mast in 2009.

Income in the leisure sector remains under pressure with location being key. The South West and South East of England recorded the highest levels of income from this sector at £7 per acre and £12 per acre respectively. The firms says that the prolonged weak economic climate has clearly affected this sector which is clearly illustrated by the South West of England, where income from this sector is just a third of the £24 per acre that was recorded in 2009.

For estates considering a renewable energy project, the key driver on 80% of estates is the generation of another income stream. The main challenge in proceeding with a project is the capital cost and availability of funds, with planning also seen as a significant hurdle.

Income from renewable projects in 2013 averaged just over £4 per acre with solar photovoltaic schemes the principal source of income.

The 2013 survey results recorded the strongest income, gross and net, growth for several years. The firm expects gross incomes to continue rising steadily although costs and therefore net incomes will face some pressures.