UK farm loans: a responsible investment choice

Gaining investment exposure to UK farmland is near impossible. But issuing loans to UK farmers provides access to the industry and enables investors to do some good along the way, argues Robert Bourn, partner at Agri Partners, a rural lending firm.

There are many ways to invest in agriculture but for investors with a preference for a more tangible approach, then owning farmland might be a great way of gaining exposure to the sector’s well known macro fundamentals.

But farmland located in the best markets can be hard to buy, mainly due to the fact that its supply is limited and demand is high and the UK is one such example.

There are less than 100,000 acres of farmland sold each year in the UK, which might sound like a lot, but this figure is down from about one million acres around 70 years ago. And from a demand perspective, Savills the estate agent estimated that they had over £4.8 billion of buyer mandates waiting for farms to come onto the market.

That’s about one million acres, or 10 years’ worth of current supply ready to be deployed right now, so accessing UK farmland is certainly challenging.

Of course you can look at other less developed countries where land is plentiful such as those in Africa and Asia but these entail a lot more investment and ethical risks.

So wanting to provide investors access to an otherwise relatively inaccessible market, and to focus on a market we know very well, we have uncovered a huge opportunity in the rural loans market that is directly linked to the end of the credit crisis and the withdrawal of high street banks from the real estate and asset-based lending market.

We are also keen to improve the conditions for this industry and enable farmers to own the land they operate; they can participate in the long term upside to both incentivise and reward the farmer for his, or her, good stewardship of the land.

So since 2009 we have been helping investors gain exposure to UK agriculture by funding the farmers directly. We have done this predominantly for farmers who were caught on the wrong side of the credit crunch and have problems accessing finance from the high street – or in other words – we invest in farmers that are asset rich, credit poor.

However, traditional lending does not always work well for farmers. Why? Well medium term finance, say for example five years, for most small-to-medium sized farmers will be priced at between 8 percent and 12 percent per annum, or even more if they have an adverse history.

And farmers can struggle to service a fixed rate of 10 percent each and every year, after all farming is cyclical and sensitive to external factors such as weather and is therefore volatile. So offering a product that charges farmers in a way that compensates for volatility may prove a more sustainable solution.

So what we do is we set a base rate that is not far from the current prime mortgage lending rate — currently around 6.5 percent — and at maturity we share any capital growth in UK farmland values over the period of the loan.

This arrangement means the farmer can borrow money and make payments at a rate which is sustainable for his business, he or she can share in the capital growth of the farm at the same time as reducing his/her loan-to-value ratio. The latter in turn may help him refinance with high street lenders at the end of the term.

On the flip side, investors gain a fixed income-type return on an annual basis, capital gain from increasing farmland values, capital protection from the farmland and a socially responsible investment without sacrificing returns.

So, while some economic trends bring peril, they also represent an opportunity for the entrepreneurial. This culmination of unique economic, social and political conditions heralds an era rife with potential for the astute investor. And as with all great periods of economic opportunity, there have also emerged a number of new players, like ourselves, that have sought to position themselves to provide investors with an opportunity to profit.