Pension fund appetite drives doubling in UK farm prices since 2010

Competition from pension funds and wealthy individuals has helped double investment-grade farmland prices to £12,500 an acre over 5 years, with prices soaring faster than luxury London homes, according to Knight Frank research.

The price of UK investment-grade farmland has doubled over the last five years to £12,500 an acre ($18,950; €16,980), driven by competition from pension funds and wealthy individuals, far outstripping the rise in London house prices since the financial crisis, property advisory firm Knight Frank said.

The value of the best English farmland in blocks of 1,000 acres or more has risen by 100 percent since 2010, Knight Frank said in its Autumn Rural Report, citing its recently introduced Investment Farmland Index. The average farmland price has increased by a more modest 43 percent to £8,300 per acre. In comparison, luxury London homes have increased by 42 percent in value, Knight Frank said.

“The market over the last couple of years has very much been driven by investment buyers in competition with land-owner farmer buyers,” Tom Raynham, head of agricultural investments at Knight Frank told Agri Investor.

British pension funds that have traditionally been owners of farmland are increasingly looking at potential investments, while foreign high net worth individuals are also interested in buying farmland in the UK. Buyers can expect yields of 1.5 to 2 percent, reflecting the asset’s safe haven status, with capital growth taking potential returns over 3 percent, Raynham added. Bank leverage is readily available to boost returns further.

The attractiveness of UK farmland received a boost in August last year with the sale of almost 40,000 acres of farmland by retailer and financial services firm the Co-operative Group to health charity The Wellcome Trust for £249m. The deal galvanised pension fund interest and has helped stimulate the flow of properties onto the market. The area of UK farmland being publicly marketed for sale stood at almost 80,000 acres at the end of June 2015, an increase of more than 20 percent on the 66,000 acres up for sale a year earlier.

“Pension funds are now coming back into the market but they are looking much longer term. Where they used to have a 5 to 10-year view, now they are looking at a 20-year horizon – which is where you need to be,” Raynham said.

As a result of the increased supply, Knight Frank sees a slowing in farm prices. The Knight Frank Farmland Index rose by just 0.5 percent in the third quarter of 2015, slowing from the 10 percent increase recorded over the year to June.

However, UK farmland prices remain high compared to prime agricultural land around the world. Prices are more than double the almost £6,000 paid per acre in New Zealand for dairy land and nearly three times the £4,500 recorded in Argentina, according to Knight Frank.