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Update on Land
Prices July 2006
Smart property
investors should look beyond the saturated urban market to the
countryside. Farmland is currently undervalued but is unlikely to
remain so and forestry is an extremely tax-efficient investment.
The Budget
changes to trust law have encouraged professionals to search around
for alternative means of inheritance tax mitigation. Add to this,
disillusion among many investors still suffering from losses on
equities sustained in the 2000-03 bear market, along with an
overheated residential property market, and it is hardly surprising
that interest is focusing on agricultural land and forestry as an
alternative investment – with huge tax advantages.
Owners of
agricultural land and forestry pay no inheritance tax on these
assets, provided they have been held for at least two years before
death, and there are ways of mitigating capital gains tax too. In
addition, forestry can provide tax-free income.
And there are
other factors which make land an attractive investment. For those
who are not concerned with the protection of rural England, the
government’s proposals to ‘concrete over’ the green belt,
while unlikely to be implemented in full, will definitely enhance
the value of land which is within the designated area, or adjacent
to land which already has planning permission to build.
Land in the
south east, with good access and next to existing development has a
high strategic value and can command prices of £200,000 per acre.
Anything suitable for, or related to, equine use also commands a
higher price, particularly if it is in a ‘horsey des-res area’.
For some time
now the quarterly surveys of rural land from the Royal Institution
of Chartered Surveyors (Rics) have highlighted rising land prices as
wealthy City ‘lifestyle farmers’ purchase land adjacent to their
country homes to protect themselves from unwanted development. There
is also the amenity value of land to be taken into account,
particularly grazing for horses or anything with fishing rights.
The Rics survey
shows that farmland prices rose by 3% year on year from January to
March 2006. Demand for residential farmland rose at the strongest
pace for two years. ‘City bonuses have fuelled higher demand in
the residential farmland sector as purchases from amenity and
lifestyle buyers have recovered strongly since the turn of the
year,’ says Julian Sayers of the Rics. ‘The share of the market
going to non-farmer individuals is currently at 46%, the largest
proportion in one and half years.’
Rics, the
leading authority on land values, predicts that the value of
residential farmland is expected to increase strongly, as the influx
of buyers continues. ‘Fears of inflation following expected
interest rate hikes may encourage more investors to seek out real
assets as opposed to holding paper money.
Economic
confidence and City bonuses continue to push up residential farmland
which has continued to outperform equities over the last five years
as an investment,’ says Sayers.
Chartered
surveyor Colin Lees-Millais of FIM Services, a leading IFA
specialising in agricultural and forestry investment, agrees. ‘If
you compare arable land prices in
England
, with
Ireland
,
Holland
and
Denmark
then there is a
view that it is undervalued.’
He believes that
agricultural land is due for an upturn now that the EU has sorted
out the subsidies, which have directly contributed to a fall in
farming incomes over the past 10 to 15 years. ‘Since the early 90s
there has been a disconnect between farming income and land values.
What has driven prices has been supply and demand.’
‘Grade three
arable land which is the less productive land has continued to rise
while grades one and two have flatlined. The reason grade three has
risen is amenity use. But this will change with the reform of
subsidies. Farmers will now be paid to manage their land and will
look to alternative crops like bio-energy fuels. There is more
farmer interest now,’ says Lees-Millais.
This is borne
out by the Rics survey. Individual farmer buyers now account for 43%
of the market, up from 38% in the fourth quarter of 2003. Demand for
commercial farms is also rising steadily, with 43% more surveyors
reporting a rise than a fall, a new five-year high. Farmland prices
averaged £8,262 per hectare in the 12 months to the first quarter
of this year, up 12% from the same period last year.
‘Surveyors’
outlook on land prices is very confident, close to a six and a half
year high, suggesting that farmland will continue to see
strengthening prices in the next few quarters,’ says Sayers.
‘Things are
changing in the rural land market as the trend seen over the past
two years begins to turn around. For the first time since 2002, the
influence of non-farmer buyers is decreasing in favour of farmers.
This has been brought about by an improvement in the returns for
certain sectors and growing certainty regarding the outcome of the
Common Agricultural Policy mid-term review,’ Sayers says.
‘Chartered
surveyors believe, however, that some farmers are holding back from
putting their property on the market until the final implications of
the single farm payment regime are known.’
Returns from
forestry over the past year have been good too. The IPD Forestry
index shows that forestry produced a total return of 14.4% in 2005,
the highest figure since the index began in 1992. Similarly timber
prices have risen by 15.5% over the past 12 months, pushing up the
return from forestry, making it particularly attractive to higher
rate tax payers since the income is tax free.
‘Commercial
woodland prices moved upwards in 2005, influenced by confidence in
the future timber market and by a shortage of supply in all
regions,’ says Alistair Sandels of forestry management company
Fountains. Sandels reports high demand for forestry investment
properties.
This view is
endorsed by his colleague Alan Guy. ‘Over recent months, forestry
property prices have seen an upturn due to an increase in timber
prices and the attraction of inheritance tax relief. Properties are
much in demand and guide prices are being achieved and in most cases
exceeded. We expect the strong demand to continue throughout for
both lowland amenity woodlands as well as commercial coniferous
plantations.’
So how do
investors participate in this upsurge in prices for agricultural and
forestry land and protect their assets from inheritance tax? Minimum
direct investment in forestry is around £250,000 and you will need
around £100,000 for a saleable investment in agricultural land or
nearer £1.5 million for a working farm.
But there are
other vehicles for smaller investors. Forestry is particularly tax
efficient as it is not only possible to eliminate all liability to
inheritance tax and capital gains tax, but income from forestry is
tax free too.
‘We run 35
timber funds and have just launched our 36th,’ says Lees-Millais.
FIM is also launching its first agricultural land fund which will be
available within the next couple of months. Minimum investment is £25,000
and the structure gives investors all the tax advantages while
benefiting from economies of scale and reduction of risk through
diversification. There is also the comfort of knowing that your land
is being managed by experts.
‘We provide
specialist investments in a range of products based on forestry,
agriculture, renewable energy and the rural land market in general,
many structured to be tax efficient in eliminating a liability to
inheritance tax and in some cases income tax and capital gains tax
too. These investments are marketed directly to investors and
through IFAs targeting clients seeking tax efficient investments and
portfolio diversification.’ IFAs introducing business to FIM are
paid 3% commission.
For those who
want to invest direct in land or forestry, how do you raise the
money? ‘Mortgages for land purchase come into the broad spectrum
of commercial loans,’ says broker, Mark Ashbridge of Savills
Private Finance. ‘Like a residential mortgage, you have to get a
valuation and you can generally borrow up to 70% loan to value.
Borrowers have to show a reasonable ability to service the debt and
the lender will look at other commitments.’
‘You can
borrow for up to 25 years and you can get five to 10 years interest
only. A few lenders will look at 25 years interest only. Interest is
usually 1-2% over bank base rate,’ Ashbridge says. Is there much
choice? ‘For a loan of say £250,000 you would have the choice of
around a dozen lenders.’
Otherwise a land
mortgage is pretty much like a residential mortgage – only more
expensive. You will pay around £2,000 to £3,000 for a valuation on
a £2 million purchase and you generally have to pay the lender’s
legal costs, as well as your own. Brokers fees are 0.5% to 1%.
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