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Playing the field

Speculators homing in on agricultural land as a potential investment opportunity may find they do not always reap what they sow.

If you travel by car around the countryside, you will have seen many signs advertising the sale or auction of woodland, greenfield sites and farmland. Along with the move towards a greener environment, are we likely to see investment opportunities in agriculture or even organic agriculture as a specialist market?

Many people are speculating on the need for more and more housing stock and are looking at investing in areas of Green Belt and agricultural land that they believe will be released from its current status for development.

This land is already selling at a premium. Prices per acre are much greater than the land’s current status would generally attract. Several studies support similar conclusions and one survey claims that land across the UK has increased in value by as much as 926 per cent over the last 20 years.

Research from Halifax shows that residential land prices increased nine-fold from 1983 to 2003.

Housing minister Yvette Cooper has said the English population is expected to grow by 5.7 million over the next 20 years. People are living longer and increasing marital break-up means that single family units are splitting in two.

Demand for land is likely to remain high but this is a case of buyer beware. If you decide to make this type of investment, you should be aware that change of use of the land may be a long way off in the future or may not happen at all. In the interim period, the land needs to be managed, so you may incur costs for the upkeep if it is not being used for other purposes.

This should therefore be looked at as a riskier investment than other land purchase and advice should be sought from experts in the area of the land’s potential as there may be other environmental issues which may result in the land not even being attractive to developers.

Woodland and agricultural land generally attract similar inheritance tax relief as that applied to business as long as it is being used for commercial purposes such as timber or working farmland, either directly by the owner or through tenancy. In the case of woodland, whether or not it is used commercially, an election can be made on transfer at the time of death to have the value of the timber excluded from the deceased’s estate.

The HMRC website describes agricultural land where relief should be available as including the following:

– Any farmhouses, cottages or buildings which are of a character appropriate to the property.

– Woodland and buildings used for intensive rearing of livestock or fish, if they are occupied with agricultural land or pasture.

– Growing crops, when transferred with the land.

– Stud farms engaged in the breeding and rearing of horses and land used for grazing associated with those activities,

For those of us with a more green outlook on life, this type of investment, while producing low returns in the short term, may produce benefits and greater returns in the longer term as social trends in the UK seem to show that rural and semi-rural lifestyles are more appealing and have become more popular than living in towns and cities.

I was also interested to hear of another opportunity to invest in land with the launch of the Schroder AS agriculture fund. The fund’s investment objective is to generate a total return in the long term through investment in agricultural commodity-related instruments globally. The fund uses agriculture commodity futures and agriculture commodity-related equities.

This fund looks to invest at least two-thirds in global commodity futures but not the actual commodities themselves and has a truly global exposure.

There is no doubt that this is a high-risk fund but there is perhaps an argument for some exposure to this type of investment within a portfolio. Higher potential returns may be achieved through investment as agricultural commodities are considered cheap to purchase at the present time, demand is rising, supply is constrained and they have little representation in equity markets. They can provide lower risk through diversification due to low or negative correlation with other asset classes.

This is not a direct investment in land but it could provide an alternative means of investment collectively rather than direct, opening up opportunities to invest with lower sums of money.

Lisanne Mealing is a director at MDM Associates.

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