The US farmland market has outperformed other US real estate assets over the past 15 years recording an average total return of 13% for agricultural investment properties, a new analysis shows.
This performance has been boosted over the last three years by high commodity prices, according to the analysis report form international real estate advisor Savills.
It points out that while not immune to volatility, the farmland market has not been affected to the same degree as the residential and commercial property sectors.
‘Farmland and agriculture in the US can offer real opportunities for top investment performance but unlike the UK, where demand from non-farmers is a real driver of value, in the US commodity price fluctuations are likely to have a greater effect on values because of the closer relationship with farm profitability,’ the report explains.
This differing weighting of the productive capacity on value is reflected in the income yields. In the US 3 to 6% is achievable in the key agricultural areas of the US, which contrasts with typical income yields of 1 to 3% in the UK.
Where land is let in the US the average lease period tends to be shorter averaging from three to five years in order to avoid declining rental yields and to maximize investment returns. In the UK, farm tenancies let in the open market average between five and 10 years.
Since 1950, average values across the US recorded an annualized increase of 6.6% with an increased rate of growth during the past 10 years of 8.1%. The corresponding figures for UK farmland are 7.5% and 13.7%.
The report explains that these higher UK growth rates are largely explained by a reduced supply and the increased presence of non-farming/investor buyers. In the US, farmers represent 75% of buyers with investors accounting for the remainder while in the UK the proportion of farmers buying during 2014 was 45% with institutional/corporate and non-farmer buyers fairly evenly spread across the rest.
‘For investors looking for scale, high value niche markets and the opportunity for a reasonable income yield, the US is a realistic proposition particularly when combined with the medium to long term capital growth forecasts against a backdrop of a mature and transparent market,’ the report adds.
It also points out that the US farmland market is not bound by one law with regard to Foreign Direct Investment (FDI) and some states and provinces restrict overseas ownership and subsidies are not available to overseas individuals and entities. ‘However, with some advance planning investment can be efficiently structured to preserve the UK tax advantages of investment in farmland while allowing investors access to the US market,’ it says.
Currently, relatively little US farmland is held in direct overseas ownership accounting for just 1.15% in 2012 with the largest proportion of overseas ownership concentrated in Maine.
The US has more arable land within its borders than any other nation at around 160 million hectares just above India and it is the largest producer and exporter of corn, wheat, soybeans and livestock in both volume and income. It accounts for a quarter of total world GDP from agricultural products, only surpassed by the entire market of Europe.
‘We expect demand in US farmland to increase from UK investors, which may add a level of support to the US market, especially as there are significant sums of money available to diversify relatively small proportions of total investment portfolios. Other opportunities to enhance value including strategic development and minerals should not be discounted. These by virtue of the size of the US are significantly fewer than in more densely populated countries such as the UK,’ the report concludes.
This article was republished with permission from Property Wire.