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UK estates income growth weaker than previous years but exceeds forecasts

The growth during the 12 months to the end of April 2011 is weaker than in recent years but exceeded the modest 2% forecast, the 12th edition of the Savills Estate Benchmarking Survey shows.

The analysis of the performance of individual estates shows that during today’s global economic uncertainty it is more important than ever for estates to hold a diverse range of property assets, according to Ian Bailey, head of Savills rural research.

‘Likewise, identifying core target markets and optimising income generating opportunities has a significant bearing on an estate’s gross income. In the South West income from the leisure sector was double that for the average of all estates in the survey and in the South East income generated from residential and commercial property dominated,’ he said.

Across all estates the income derived from agricultural sources increased by 2%, which led to a 33.5% contribution to gross income. Rental income for Agricultural Holdings Act and Farm Business Tenancies increased and this is likely to continue.

‘Agricultural Holdings Act rent reviews, particularly in traditional livestock areas are seeing significant increases with there being a growing acceptance that farmhouses and cottage are a ‘material consideration’ in the review process,’ said Mike Pennington director of Savills rural.

In the 2011 survey year this increased by 5.9% representing 38% of gross income. The average annual Assured Shorthold Tenancy increased by 5% to £8,300 per dwelling. Unsurprisingly, average rental levels were highest in the South East at over £10,700 per dwelling.
An increasing demand for good quality, well located rental stock may present some estates with good opportunities for income generation including refurbishing more properties to a higher standard to maximise market rents and where possible converting redundant barns to residential, the report points out.

The commercial sector contributed 16% of gross income with office space performing most strongly. Location remains the key to rental values with the highest rents of £13 per square foot achieved in the South East compared with the ‘all estate’ average of £10 per square foot.
The average rental income from telecom masts is now £1,400 per mast less than the £7,300 during the peak of 2009.
Despite the recovery of commercial property, equities and gilts the performance of rural estates remains competitive against alternative investment assets when annualised over three, five and ten year periods. The average total return from all let property across the survey sample was 9.3%, net income 1.3% and capital growth 8%.

Increases in the costs of building materials and insurance premiums contributed to a 9.5% increase in total expenditure for all estates. Average property repairs represented half of the total expenditure equivalent to 23% of gross income.
Savills expects that over the next two years average gross incomes will increase each year although possibly below the rate of inflation. Forecasts anticipate modest average rental income growth across all sectors along with a continuing shift, where possible, towards market rents in both the agricultural and residential sectors.
In the future the opportunity for rural businesses to generate energy and income from renewable energy sources is significant, although only 13% of estates which contributed to the survey confirmed the completion of an energy audit, the report concludes.