The latest results from the IPD Rural Property Investment Index, show that returns dropped 29.8% in 2008 compared with the previous year. But although the results may look weak, as they did during the previous recession in 1990/91, rural property performed well compared with other types of property investment. Rural property's return of 1.3% compares well against commercial property (-22.1%) and residential property (-15.3%). It also outperformed shares, the report says .
The main reason for the fall in total return compared with recent years is that the capital value of rural property, a mixture of farmland, houses and commercial buildings, fell 0.7% having previously increased by 27.4% in 2007.
The spectacular increases in farmland values since 2006 have been the main driver of returns for rural property until this year. Farmland values reached their peak in the middle of 2008 and then dropped back to around the same level as at the start of the year. So there was little or no increase in capital values of farmland in the Index.
The residential and commercial property in the Index fell in value during the year, typically by between 5 to 15%, which caused the capital value of all of the rural assets combined to fall by 0.7%. Agricultural rent rises help maintain income return and the income generated by rural property was 2.0% of its capital value, the same as in 2007.
'Rural property is often considered a good defensive or counter-cyclical asset to have in a portfolio. The evidence from 2008 and also the previous recession in 1990/91 supports this. Rural property has weathered the storm better than other property asset classes,' says the report.
'It was the only property asset which produced a positive total return in 2008 and in the previous recession was the only asset class, other than gilts, that did not produce negative returns,' it adds.
This is because demand for agricultural land, which is the main type of asset in the Index, has remained strong, especially compared to other assets during the recession as most farmer and investor buyers are buying for the long-term.
Also the medium to long-term outlook for agricultural commodities continues to be positive. 'Although the UK economy is weak and shrinking and has some effect on farmland prices, the long-term demand for farmland and positive medium to long-term outlook for commodities partially insulate rural property from the ups and downs of our domestic economy. Positive returns are expected in 2009 to 2010,' it concludes.
