Forget gold, farmland makes sense
Here is a suggestion from the Graham Norwood school of property investment: why not put money into British farmland?
It seems a perverse suggestion given that farmland prices across the Western world have had fewer spectacular peaks and troughs than other property-related investments like commercial premises, the residential sector or even property funds. But actually, that's the point.
We are living in a period where no investment is safe, perhaps least of all those that show sharp rises only to suffer equally swift falls. Spectacular is out, safe-but-dull is in.
British farmland rose in value by 21 per cent in 2008, despite a slowdown late in the year, according to land agents. This is a remarkable performance compared with, say, mainstream residential prices which saw falls of some 15 per cent in the same period. It takes the five-year increase for farmland to 135 per cent, also well ahead of commercial property. In the longer term, the performance is even better.
Many investors see gold as a good investment in times of economic uncertainty but in fact British farmland has performed even better in the past 25 years. If you look back to 1983 and take the price of gold and British farmland at that time as a base, gold has risen in value by 81 per cent but farmland is up 115 per cent – indeed, even oil prices have risen only a little more than farms.
Now if you selectively choose shorter periods within that quarter of a century, residential and commercial property have both performed better still but they have then floundered badly over the longer term. Not so farmland – small peaks, smaller troughs, and a good long-term performance have been the norm.
Little wonder that in the past 12 months only 53 per cent of the purchases of British farmland have actually been undertaken by farmers. Many of the remaining 47 per cent involved bankers spending bonuses – don't expect that to happen in 2009 – and institutional investors seeking a good long-term bet. That final group is likely to play a bigger part in the future, as the search for a safe haven for funds becomes a little more frenzied. After all, stock markets are not exactly guaranteed to be successful, are they?
The Danes and the Irish have long invested in British farmland, attracted by a similar climate to theirs and a looser regulatory framework for ownership and governance. British farm experts now expect a much wider level of international interest, because not only is there an impressive track record but there are also falling exchange rates to make asking prices particularly appealing to foreign buyers.
I doubt very much whether we have seen anything like the long-term peak of British farmland prices, whatever happens month-to-month. Average regional prices range from £2,928 (Dh15,640) per acre in Scotland to £4,180 per acre in the East Midlands and £4,796 in East Anglia. So why will they rise in the long-term?
There will always be demand for land from farmers to increase their boundaries or who want increased privacy around their existing farmhouse home. In addition, farms in Britain tend to be well-managed; most have relatively low gearing and have diversified so are not seriously exposed to financial uncertainty, and while they may not buck all the effects of a global recession they may at least be well insulated. If British government housing targets are confirmed when the recession ends, it is expected that some agricultural land may be used for new homes too. They will trigger a sharp increase in value, should it happen.
There are strong alternative investment prospects, too, thanks to the expected expansion of the use of bio-fuels currently under trial by airlines and some car manufacturers, and the British government's promotion of anaerobic digesters which rely on – amongst other things – crop wastes to be turned into energy. Industry experts predict that this will help create a constant and reliable demand for crops. When they have high commodity prices worldwide, the fields will be used for that purpose; but when food demand drops the fields will grow crops for bio-fuels, instead.
The biggest obstacle for overseas purchasers is actually finding a farm to buy. With little debt and good growth enjoyed in recent years, British farmers have rarely been better placed. But there are some farms coming to the market as the weather improves in Britain in March and April, and the expectation is that there may be a scramble to purchase them.
These days, nothing can offer 100 per cent financial safety. But farmland has been a traditional hedge in times of economic uncertainty – and so it is proving now.
- Graham Norwood is a property correspondent for The Observer.
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